What an ETF CFD is

A fund share is a claim on a basket 

An ETF is a fund before it is anything else. It pools money, buys a defined set of assets with it, and issues its own shares against that pool. That set is the basket, and what may go into it is not discretionary: it is fixed by the fund's stated objective and published in advance in the prospectus. Most often the objective is to hold the constituents of a named index in index proportion, so the basket is that index made physical. Others follow a rule written by the issuer, or leave the selection to a manager.

The word exchange is what separates an ETF from an ordinary fund, and it is why two prices exist rather than one. An ordinary fund is dealt with the manager at a value struck once a day. An ETF's shares are listed, so they change hands between buyers and sellers throughout the session at whatever price those parties agree. Net asset value is the first number: everything the fund holds, less what it owes, divided by the fund shares in issue. It is a calculation rather than a quote, and no transaction happens at it. The traded price is the second, and when it sits above net asset value the fund trades at a premium, when below, at a discount.

What holds the two numbers together is a mechanism peculiar to this structure. A small group of large institutions, the authorised participants, may deliver a bundle of the underlying holdings to the fund and receive a block of newly created fund shares, or hand shares back and receive holdings. So when the traded price runs above net asset value, assembling the basket and creating shares against it is an arbitrage that adds supply, and when it falls below, redeeming withdraws supply. The mechanism is a market process, not a guarantee. It works while the holdings are liquid and can themselves be traded, and less well when they cannot, which is why premiums and discounts widen precisely when a basket is hardest to trade.

What the contract actually references 

A CFD on an ETF is written on the fund's traded share price. Not on its net asset value, and not on the assets in the basket. The instrument is derived twice: the fund wraps a basket of holdings, and the contract wraps the fund's listed shares. Each layer has its own price, its own costs and its own hours, and the layers can disagree for stretches at a time without anything having gone wrong.

What a CFD holder does not receive, established earlier in this module, applies here unchanged. No fund share changes hands, the holder does not appear on the fund's register, and there is no entitlement to the distributions a fund makes from the income its holdings generate. Where a fund distributes rather than accumulating that income, its share price falls on the ex-distribution date exactly as a share price falls when it goes ex-dividend, and providers commonly adjust open positions to match, crediting a long position and debiting a short one.

Why a tracking fund never matches its index 

Tracking difference is the gap, over a stated period, between the return of a fund and the return of the index it follows. Tracking error is a different measurement often given the same name: it describes how much that gap varies from period to period rather than how large it is, so a fund can carry a steady, predictable tracking difference with very little tracking error. Four mechanisms produce the difference, and all four are structural rather than accidental, which is why they can be enumerated at all.

• The expense ratio. A fund's management fee and running costs are deducted from fund assets continuously, expressed as an annual percentage of those assets. The index is a calculation and has no costs at all, so a fund that charges anything lags its index by approximately its expense ratio before any other effect. The largest of the four, and the most predictable.
• Sampling. A fund tracking an index with a very long membership list, or one whose smaller members are expensive to trade, commonly holds a representative subset rather than every constituent in index proportion. A subset behaves like the index approximately, and approximately is the whole of the word.
• Cash and timing. Dividends arriving from the holdings sit as cash until the fund puts them back into the basket, while total return index calculations conventionally assume the payment goes back to work at once. Rebalances, membership changes and money moving in and out of the fund all require trading, and trading happens at a price.
• Tax. Withholding tax on dividends depends on where the fund is domiciled and where its holdings are listed, and published index returns rest on a tax assumption that may not match the position of any particular fund.

The difference does not always run one way. A fund that lends its holdings out for a fee, a practice called securities lending, earns revenue that offsets part of the drag and occasionally more, so a fund can finish a period ahead of its index. The arithmetic of the main case is small enough to work through in full.

Two layers of cost, charged in two places 

A CFD on a single company's shares carries one layer of cost, the cost of trading the contract. A CFD on an ETF carries two, and the extra wrapper is the reason. The fund charges for running the basket and the provider charges for the contract, in different places, and neither substitutes for the other.

The first layer sits inside the fund and is invisible from the contract. The expense ratio is deducted from fund assets daily, so it appears on no statement a contract holder sees. It arrives instead as a fund price slightly lower than the index would otherwise imply, and it is charged for as long as the fund exists rather than for as long as a position is held. A contract inherits it through the reference price, at one remove.

The second layer is the contract itself, and it is the familiar one: the spread between the quoted prices, any commission the provider charges, and financing on a position held past the daily cut. Financing on a CFD is calculated on the full value of the position rather than on the amount posted against it, and it accrues for as long as the position remains open.

The practical consequence is a comparison that is easy to get wrong. Setting the trading cost of an ETF CFD beside that of a shares CFD compares one layer with one layer, and omits a charge that exists on one instrument and not on the other.

Hours, and what moves the price 

An ETF's shares are listed on an exchange and trade in that exchange's session, so an ETF CFD quotes those hours. In this it behaves like a CFD on a single company's shares rather than like an index CFD, which can be priced outside its cash session from a continuously traded future. Once the listing exchange closes, price discovery for the fund's shares stops and there is nothing left for the contract to follow.

A second timing question belongs to funds specifically. A fund listed in one region may hold assets listed in another, so for part of its own session it quotes a basket whose markets are shut and whose prices are stale. The traded price then reflects an expectation of where those holdings would be if they were trading, which is one ordinary source of a premium or discount and resolves when the other market opens.

Otherwise, what moves an ETF price is what moves its basket, weighted the way the basket weights it, so for an index tracking fund the drivers are the drivers of the index. Only two things belong to the fund rather than to its holdings, and both are above: the premium or discount, and the tracking difference.

Where the per-instrument detail lives 

Everything above is structure, and structure is common to every ETF. The specifics are not. What a given fund holds and what it charges are published by the fund. What a contract on it references, what it costs to trade and what hours it quotes are set per instrument. YAL lists 100+ ETF CFDs on MetaTrader 5, and those details sit on the ETFs market pages, with the schedule on the answer on trading hours.