ETF Trading
An ETF, or exchange-traded fund, is a financial tool that follows the trend of a market or a group of markets. With this, it is possible to make a type of investment that allows market participants to buy baskets of stocks containing shares of hundreds or thousands of companies with a single purchase.
ETFs are publicly traded instruments, and ETF shares can be bought and sold at any time, just as if they were ordinary equities or bonds.
ETFs are an optimal choice for beginner investors because they are usually low-cost and help provide instant diversification to a portfolio: funds are spread out among many companies instead of just one.
Each ETF product corresponds to a certain number of futures contract positions, which are managed by a professional financial team. The fund manager can dynamically adjust the futures positions so that the entire fund share maintains fixed leverage for a specific period of time.
With an ETF, they have the goal of replicating an index as faithfully as possible, physically or synthetically.
ETFs are publicly traded securities, like stocks. During trading, therefore, they can be bought or sold at any time during the trading day. Their course follows the trend of the index: if it rises, the value of the ETF increases; if it goes down, the ETF loses value.
What Are the Benefits of ETFs?
1. Liquidity
It is easy to buy or sell new shares without running the risk of seeing their value drop.
2. Versatility
Access small quantities of major market indices.
3. Transparency
Know everything about the investment from currency exposure to creditworthiness, with full portfolios disclosed on free, public websites every single day of the year.
4. Security
Because they’re highly diversified, ETFs are generally considered safe long-term investments with historically dependable returns.
Holding a variety of investments can help diversify the risk of a portfolio. Buying just one ETF can give you a stake in hundreds of stocks or bonds. An international ETF, for example, could broaden your portfolio with stock holdings from around the world, while a bond ETF might span much of the investment-grade market.
What is the Difference Between ETFs and Stocks?
A share is a small fraction of a company that can be bought or sold after the shares are listed on a stock exchange through an initial public offering (IPO). When you buy a share, you own a part of a company, which means you can receive a percentage of the dividend (if it is distributed) and that you can also get the right to vote.
ETFs are traded in a similar way to shares, but unlike individual stocks, they track the performance of the underlying asset or a basket of assets. They can track the performance of a selection of markets, including corporate stocks, indices and commodities, but the investor does not own the underlying assets.
What are the Sources of Income from ETFs?
Traders can make profits by trading based on the price movements of an ETF. ETF providers derive their earnings primarily from the expense ratio of the funds they manage, as well as through their management costs.
ETF Pricing Mechanism
Net worth = basket position × underlying asset price + basket loan
Basket position = the number of underlying assets held by each ETF Basket loan = the number of loan coins held by each ETF
As a special leverage product, ETF's constant leverage multiple at the beginning of each day is realized through the position adjustment mechanism. If the bottom assets float to win, the bottom positions will increase. If the bottom assets produce a loss, so the bottom of the position will be reduced.
What Are the Fees?
The transaction fee rate of ETF products is the same as that of spot transactions (mostly 0.1%). A daily management fee is charged at 00:00 (UTC+8), which will be reflected in the net value of ETF products. There is no charge if one does not hold any ETF product shares.
What Is Rebalance?
Rebalance is the inherent mechanism of ETF products, which can be divided into regular rebalance and irregular rebalance. Regular rebalance ensures that ETF products can achieve the target rate of return in each cycle. Irregular rebalance is used to ensure that the net value of ETF will not return to zero and to control product risks.
Regular rebalance Typically, ETF positions are periodically rebalanced by the platform at 00:00 (UTC+8) each day to make sure that the leverage ratio is the same as agreed.
Irregular rebalance When the market fluctuates violently, if the volatility of the bottom asset relative to the last rebalance time point exceeds the given threshold (we set the threshold at 12%), we will actively rebalance the corresponding ETF to control the risk and ensure that the net value does not return to zero.
Irregular rebalance is only for the part that will suffer losses due to the volatility; that is, if the BTC increase reaches 12%, we will rebalance the ETF by -3 or -5 times, leaving no adjustment for other products.
Please note that if the trend continues after an irregular rebalance is triggered, the loss for users will be smaller, but if the trend reverses immediately after the trigger, recovery of the product will be slower due to the reduction of the rebalance.
What Are the Suitable Scenarios for ETF Trading?
ETF protects users with a rebalance mechanism to ensure that the ETF net value does not return to zero when the spot fluctuates sharply, so as to control risks.
In the case of continuous decline of ETF net value, reduces the loss of users; with repeated market fluctuations (exceeding the active rebalancing threshold), users need to bear the net wear caused by the rebalancing mechanism. Therefore, ETF products are more suitable for unilateral market and are unsuitable for long-term holding. For investors with long-term investments or with the intention to hold ETF, they should fully understand the mechanism of ETF products and bear the risks by themselves.
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