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How ETFs Became the Hottest Financial Instruments of 2020

How ETFs Became the Hottest Financial Instruments of 2020
Written by
Alex Carlson
Published on
December 29, 2020
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  • Exchange-Traded Funds (ETFs) became the hottest financial instruments in 2020 mainly because they provide both diversification and reliable market exposure for retail traders all around the world.
  • With multiple brokerage houses, such as TRADE.com, covering ETFs and CFDs based on ETFs, there is a growing demand for these products, considering stock markets are where the activity is occurring now that economic activity continues to remain subdued.

It was a year of twists and turns for global financial markets and traders will regard 2020 as one of the most important periods of their lifetime. The COVID-19 pandemic, the economic downturn induced by mitigation methods, and the aggressive responses from both the monetary and fiscal side, leading to a sharp recovery in the markets, will be topics debated for years to come.Out of this complex situation, Exchange-Traded Funds (ETFs) emerged as some of the leading financial assets among both retail and institutional investors, communicating that diversification continues to be the main objective when markets are so unpredictable. A more in-depth analysis of the rise of ETFs is required, so traders will be able to understand its implications and some of the prospects.

Economic shutdown sparked uncertainty and volatility

As the pandemic spread through the world during the spring, global stock markets took a tumble, posting record-breaking losses during the span of a month. For the first time in history, governments had to restrict economic activity to counteract the pandemic, leading to a sharp contraction, followed by a similar move on the upside.The combination of poor economic prospects and yet ample liquidity conditions in the financial markets had made trading one of the top activities, as brokerage houses posted record account openings. Brands like TRADE.com which are multi-assets were favored due to the wide range of trading instruments available.Taking advantage of short-term price movements in financial assets had become the leading objective of both retail and institutional players, generating high volatility at a time of great economic, political, and health uncertainty.

Stock markets on a rollercoaster

Stock markets in the USA, Germany, France, Australia, Japan, or Canada had all faced massive losses in March, posting figures ranging between -20% and -30%, approximately. Although expectations were poor after such a severe drop, the outcome took everybody by surprise, given markets had managed to recover almost all the losses and in cases like the US, stocks managed to reach new all-time highs.Outperforming financial assets at a time of severe economic contraction is a one-time event and due to this disconnect, market participants rely on the most basic yet most effective trading approach – diversification.

Increased need for diversification

The performance of different sectors had been in contrast. On one side of the aisle, tech, healthcare, and e-commerce boomed, while on the other, hotels, airlines, retail stores, and restaurants suffered greatly, some of them now on the brink of bankruptcy.However, considering the gains were different even among the best-performing assets, what traders had to do was to find the right allocation mix, so they will be able to take advantage of new developments, while at the same time, reducing the downside when risk sentiment deteriorates.

ETFs providing the right balance

ETFs and ETFs CFDs are tradable financial instruments that track assets like commodities, bonds, a stock market index, or a basket of different assets, which means traders have the ability to trade in an entire sector, rather than just one instrument.When trading CFDs based on ETFs, traders are not buying the ETF, but are taking advantage of price movements, on both the upside and the downside. TRADE.com and other brokerages are offering CFDs on some of the leading ETFs such as SLV, SPY, QQQ, LIT, or ARKG, enabling their customers to take advantage of the market volatility.Thanks to the recently announced new TRADE.com ETFs section, the top-performing CFDs on ETFs are made available to the average trader, as part of a larger plan to democratize access to professional trading services. Advanced risk management, innovative analysis tools, attractive leverage, and 24/5 support are some of the main benefits.

ETFs momentum heading into 2021

Passive investing continues to dominate and because of that, ETFs are heading into 2021 with positive momentum. Uncertainty is projected to remain elevated even after the pandemic will be solved, which will continue to pressure investors into searching for the right diversification.Faced with increased volatility, trading CFDs on ETFs is one of the methods to take advantage of short-term price movements, with competitive trading costs and professional security measures. A rotation from growth to value could occur next year, as interest rates start to rise, but there are plenty of ETFs based on bonds, or cyclical stocks that perform well in such an environment. CFDs and spread bets are complex instruments and come with a high risk of losing money rapidly due to leverage. 79.9% % of retail investor accounts lose money when trading CFDs and spread bets with this provider. You should consider whether you understand how CFDs and spread bets work and whether you can afford to take the high risk of losing your money.

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