rtmark
LearnBonds UK

ETF Trading UK Guide 2020

Want to start trading ETFs in the UK? This guide will cover everything you need to know.
Michael Graw
Author: Michael Graw

Last Updated: October 14, 2020
ETF trading UK
ETF trading UK

Exchange-traded funds (ETFs) have become extremely popular in the UK in recent years. These funds trade on the open market just like stocks. But instead of buying shares of a single company, you get financial exposure to numerous companies at once. With ETF trading in the UK, you can easily speculate on the fortunes of an entire industry, country, or market sector.

In this guide, we’ll cover everything you need to know about UK ETF trading. To start, we’ll offer an answer to the common question ‘What is ETF trading?’. We’ll also offer strategies and tips for beginners and highlight five of the top UK ETF brokers you can use to start trading ETFs today.

Table of Contents

    How to Trade ETFs in 3 Steps

    Want to jump into ETF trading right away? You can get started trading ETFs in the UK in just three simple steps:

    Step 1: Open a Trading Account

    etoro logo

    Open an account with a regulated online UK broker that offers ETF trading.

    Step 2: Fund Your Account

    Deposit funds into your trading account using a debit or credit card, e-wallet, or bank transfer.

    Step 3: Demo and Live Trading

    stock trading guide

    Start trading ETFs with a risk-free demo account, then move to live trading when you’re ready.

    75% of retail investor accounts lose money when trading CFDs with this provider.

    What is ETF Trading?

    Exchange-traded funds (ETFs) are baskets of stocks that trade on the open market. A single ETF might contain shares of anywhere from 10 to 500 or more different companies. When you buy an ETF, you effectively buy shares of all the different companies it contains.What is an ETF?

    Understanding how ETF prices change is important for answering the question, ‘What is ETF trading?’. Since ETF prices move up and down with the stock market, it is possible to trade ETFs for profit. The goal of ETF trading in the UK is to buy an ETF at a low price and sell it at a higher price.

    The price of an ETF is determined by the various prices of all the shares that go into it. Let’s say you have an ETF that contains Royal Mail and Tesco. If the prices of all three companies rise, the value of the ETF will rise as well. But if Royal Mail’s share price rises while Tesco’s falls, the price of the ETF could stay the same or even fall slightly.

    It’s important to note also that ETFs don’t have to contain the same number of shares of every company. For example, a technology ETF could be 70% Amazon shares by value and 30% Netflix shares by value. For that ETF, a change in the price of Amazon shares would have a greater impact on the price of the ETF than a change in the price of Netflix shares.

    Types of ETFs

    Importantly, there are many different styles of ETFs you can trade in the UK. In fact, many ETFs don’t contain stocks at all, but rather give you exposure to other types of financial assets. Let’s take a look at some of the most popular types of ETFs. 

    Index ETFs

    Index ETFs are designed to mirror major stock indices like the FTSE 100 or the S&P 500. They contain the same shares in the same proportions, so that a 1% increase in the FTSE 100 results in a 1% increase in the value of the ETF.

    What’s exciting about trading index ETFs in the UK is that they don’t just allow you to invest in blue chip stocks. There are ETFs that cover indices for smaller companies, like the AIM 50, as well as ETFs that cover country-specific stock markets around the world.Types of ETFs

    Industry ETFs

    Industry ETF trading gives you exposure to a specific market sector. For example, industry ETFs may cover broad markets like technology, energy, or consumer goods. Alternatively, industry ETFs can get very specific – for example, only covering cloud computing or gold mining companies.

    Bond ETFs

    Bond ETFs don’t contain stocks at all. Rather they are bundles of UK bonds. Bond ETFs pay distributions from the bonds they contain, and the price of these ETFs can go up or down based on the value of the bonds they include. Bond ETFs can include corporate bonds, premium bonds, government bonds, or any mix of the three.

    Commodity ETFs

    Commodity ETFs offer a way to engage in commodity trading. These ETFs contain futures contracts for commodities like oil, wheat, and gold. Specific commodity ETFs may focus on agricultural products or metals.

    Currency ETFs

    Currency ETFs contain contracts for foreign currency. Trading currency ETFs can be a good alternative to forex trading in the UK since you don’t have to worry about currency conversion fees.

    Inverse ETFs

    Inverse ETFs short sell specific industries or entire markets. The idea behind these ETFs is that they increase in price when the stock market falls.

    ETF trading costs

    ETF trading in the UK can be very inexpensive. An increasing number of online UK brokers that offer ETF trading don’t charge commissions, which saves you several pounds every time you buy and sell.

    Note that if you trade ETFs through contracts for difference (CFDs), you’ll typically be charged a spread. This is the difference between the buy and sell price for your CFD. Spreads for ETF trading can be very inexpensive – at eToro (which offers completely free outright ETF trading), an ETF CFD trade costs just 0.09% per transaction.

    One thing to keep in mind about UK ETF trading is that many ETFs have fees of their own, which aren’t controlled by your broker. These fees can be as low as 0.01% or as high as 0.5% per year. It’s important to carefully evaluate the ETF you want to trade to see whether it charges management fees. Often, you may be able to find a similar ETF with lower fees.

    Why Trade ETFs?

    ETF trading in the UK has exploded in popularity in recent years because it offers a number of advantages over traditional stock trading in the UK and mutual fund investing.

    Diversified Trading

    To start, ETF trading enables you to trade a bundle of assets at once. This is a huge deal for traders. If you think the technology sector is going to take off, but don’t want to bet on a single company, it’s impractical and expensive to buy shares of 50 different companies. With ETF trading, you can get financial exposure to dozens of technology stocks in a single trade.

    The same is true for other financial markets. With ETF trading in the UK, you can get broad exposure to an entire country’s economy, to the bond or forex markets, or to a range of commodities in a single trade.Benefits of ETF trading UK

    Low Barriers to Entry

    Another benefit of ETF trading, especially compared to similar assets like mutual funds, is that entering the ETF market in the UK is simple. ETFs don’t require a minimum investment. In fact, if you opt for a broker like eToro that offers fractional share investing, you don’t even need to trade in increments of the ETF’s share price.

    On top of that, ETFs trade on the stock market just like shares of individual companies. You can buy and sell them at any time the market is open, and you don’t need to have a special relationship with a financial advisor to get access to a hot ETF.

    Liquidity

    ETFs, and especially popular ETFs, trade fairly frequently on major stock exchanges. That’s a good thing for ETF traders in the UK, since it means there’s little chance that you’ll get stuck in a position. It’s always easy to find another trader willing to sell you and ETF or to buy shares of an ETF that you’re selling.

    CFD Trading

    A lot of ETF trading in the UK happens through CFDs. With CFD trading, you don’t own shares of an ETF, but you still get financial exposure to changes in its price.

    The benefit of ETF trading through CFDs is that you can apply leverage. If you have, say, £100 in your trading account, 10:1 leverage allows you to purchase up to £1,000 of ETF CFDs. That means you can spread your money across more positions as well as potentially make significant profits off of small changes in the price of an ETF.

    ETF Trading Risks

    ETFs inherently reduce trading risk by giving you exposure to multiple companies or assets rather than a single one. However, ETF trading still carries some risks for UK traders.

    The biggest risk is that a trade goes against you. If the value of many of the assets in an ETF drops, the price of the ETF will drop as well. You might have to sell your position for a loss.

    If you trade ETF CFDs with leverage, it’s important to keep in mind that your risk is multiplied. A 1% loss in the price of an ETF can mean a 10% loss in the value of your position when you’re trading with 10:1 leverage.

    ETF Trading Strategies

    The best way to approach ETF trading is with a clear strategy in mind. The better your ETF trading strategy, the more likely you are to achieve consistent profits. So, let’s explore some popular ETF trading strategies for UK traders.

    Swing Trading ETFs

    Swing trading strategy ETFSwing trading is a popular ETF trading strategy that aims to capitalize on short-term price trends. Often, swing trading takes place over days to weeks – in contrast to day trading, which takes place over minutes to hours.

    To identify swing trades, look for ETFs that are trading with strong momentum either up or down. As soon as the momentum begins to fade, it’s time to exit the trade. It is generally better to lock in profits when swing trading than to try to perfectly time the market and risk losing your winnings.

    Seasonal ETF Trading

    Many industries and markets go through seasonal cycles. For example, some commodities like natural gas rise in price in the winter and fall in the summer. Other cycles are ties to the holiday shopping season or the summer travel season.

    With industry ETFs, you can speculate on these cycles without committing to a single company. Look for price patterns in past years of trading, keeping in mind that every year can be different and that industries are constantly changing.

    Overbought and Oversold Trading

    Overbought and oversold ETF trading strategyOne simple method for UK ETF trading is to buy when an ETF is oversold and sell when it is overbought. This ETF trading strategy relies on technical indicators like the relative strength index and Chaikin Money Flow. While these indicators aren’t perfect, they can give a surprisingly reliable look at whether an ETF’s price has hit a top or bottom.

    ETF Trading Tips

    Getting started with ETF trading is easier with some tips to help guide you. Here are some of our best pieces of advice:

    Tip #1: Take an ETF Trading Course

    This guide is a great place to learn the basics of ETF trading in the UK. But if you want to dive deeper into strategies and techniques to profit, we recommend taking an ETF trading course. Many brokers and professional traders offer online courses to teach you the ropes.

    Tip #2: Read the Best ETF Trading Books

    Another good way to immerse yourself in the world of ETF trading is to pick up a book. There are many excellent strategy guides for ETF trading. Two of our favourites are ‘Trading ETFs: Gaining an Edge with Technical Analysis’ by Deron Wagner and ‘The Ultimate Guide to Trading ETFs’ by Don and Carolyn Dion.

    Tip #3: Start out with Demo Trading

    Before you jump into ETF trading, it’s a good idea to practice your skills. Most online brokers offer free demo trading accounts. These offer an opportunity to learn how your ETF trading platform works and develop an ETF trading strategy.

    Tip #4: Focus on a Single Asset

    A common mistake that beginner ETF traders make is to spread themselves thin by trading different types of ETFs. Instead, focus on a single type of ETF, like index ETFs or industry ETFs. Learn a lot about trading that type of ETF before moving on to funds that contain other financial assets.

    Tip #5: Always Use Stop Losses

    You don’t have to win every trade when ETF trading, but you do need to prevent bad trades from wiping out all your profits. We recommend that you always set a stop loss when ETF trading in the UK. With a stop loss, your position will automatically be closed before losses can start to mount.

    Best ETF Trading Platforms

    Choosing an ETF broker is one of the biggest decisions you’ll need to make. Your broker will determine whether you can trade ETFs outright or ETF CFDs, as well as how much trading will cost. Your broker’s ETF trading platform will also be your main source of technical and research tools.

    With that in mind, let’s review five of the top platforms for ETF trading in the UK:

    1. eToro - Overall Best ETF Trading Platform with 0% Commission

    eToro is our top recommended ETF broker in the UK. This broker offers direct trading on more than 450 ETFs of all types, so you can get exposure to a broad range of markets. Even better, if you want to add leverage to your trades, eToro offers ETF CFDs at up to 5:1.

    We also love eToro’s ETF trading platform. It comes with a built-in social network where you can interact with other ETF traders from around the world. eToro also supports copy portfolios, so you can easily mimic the positions of more experienced ETF traders.

    Trading at eToro is 100% commission-free regardless of whether you trade ETFs outright or through CFDs. For CFD trading, the spread is locked in at just 0.09% per trade.

    Our Rating

    • 0% commission ETF trading
    • Buy ETFs outright or with CFDs
    • Social trading network
    • More than 450 ETFs available
    • Charting software doesn’t support custom indicators
    75% of investors lose money when trading CFDs.

    2. Plus500 - 100:1 Leverage for ETF CFD Trading

    If you’re looking to make big bets on the ETF market, Plus500 is the UK broker of choice. With this CFD broker, you can apply leverage of up to 100:1 to your ETF trades. All trades are commission-free, although spreads for ETF CFDs at Plus500 are typically around 0.45%.

    A nice thing about Plus500 is that it has such a wide range of ETFs available. You’ll find hundreds of ETFs in total, including numerous industry and index ETFs for the US and UK markets. There are also dozens of different commodity ETFs and index ETFs for emerging markets around the world.

    Plus500 offers traders a proprietary ETF trading platform that’s highly intuitive and user-friendly. You can’t create your own custom technical indicators, but the charting software ships with nearly 100 different studies to help you build an ETF trading strategy. Plus500 also has a handy mobile app for trading on the go.

    Our Rating

    • Trade ETFs with 100:1 leverage
    • Hundreds of ETFs across markets
    • Easy to use ETF trading platform
    • Commission-free trading with low account fees
    • Relatively high spreads for ETF trading
    80.5% of investors lose money when trading CFDs.

    3. Capital.com - Improve Your Trading with Artificial Intelligence

    Capital.com offers trading on over 100 ETFs through CFDs. The broker’s selection isn’t the widest we’ve seen, but you’ll find plenty of index ETFs for speculating on emerging markets and market sectors in the US and UK. All CFD trades are commission-free, and spreads are slightly below the industry average.

    The neat thing about Capital.com is that this broker’s ETF trading platform leverages artificial intelligence to help you trade smarter. The AI will automatically analyze your trades to identify patterns that contribute to your profitability. Based on that, you might get suggestions to trade one subset of ETFs more often or to change up your trading hours.

    Capital.com’s charting software is good for beginner and intermediate traders. It’s easy to use and comes with a wide range of technical indicators built in. However, advanced ETF traders will want to note that it doesn’t allow you to create your own indicators or backtest a strategy.

    Our Rating

    • Commission-free trading with low CFD spreads
    • AI system offers trading suggestions
    • User-friendly trading platform
    • Wide range of index ETFs
    • Relatively few forex, commodity, and industry ETFs
    There is no guarantee you will make money with this provider.

    4. AvaTrade - ETF Trading with MetaTrader 5

    AvaTrade offers CFD trading on several dozen popular ETFs, including a number of index, industry, and commodity funds. While the selection is on the whole limited, we like that AvaTrade offers commission-free trading and below-average spreads. Plus, you can trade CFDs with leverage of up to 20:1.

    The real benefit of this broker is that it includes access to some of the most powerful ETF trading platforms we’ve seen. You get access to both AvaTrade’s own charting software and MetaTrader 5. AvaTrade’s platform is ideal for everyday charting and trading, while MetaTrader 5 enables you to create custom technical indicators.

    It’s hard to overstate the importance of these tools. Although it can be somewhat difficult for beginners to use, AvaTrade’s platform allows you to backtest your trading strategy against historical price data. Plus, you can even automate your trading to buy and sell ETFs without lifting a finger.

    Our Rating

    • Includes access to MetaTrader 5
    • Create custom technical indicators
    • Trade ETF CFDs at 20:1 leverage
    • Commission-free trading with low spreads
    • Limited range of ETFs for trading
    There is no guarantee you will make money with this provider.

    5. IG - Offers Thousands of ETFs

    IG is one of the most established online brokers in the UK and it offers an incredibly wide range of ETFs. With this broker, you get access to several thousand ETFs from US, UK, and European investment firms. That means that you can pick and choose from several ETFs for the same underlying asset.

    Another exciting thing about IG is that you have three different ways to trade ETFs in the UK. You can trade ETFs directly, trade ETF CFDs, or speculate on the price of ETFs through spread betting.

    CFD trading and spread betting are commission-free, while direct ETF trading comes with commissions of up to £3. IG offers traders access to the ProRealTime ETF trading platform. This is an advanced software that supports custom indicators, multi-chart dashboards, and backtesting against historical price data

    • Thousands of ETFs to choose from
    • Trade with CFDs, spread betting, or direct investment
    • Commission-free for CFD trading and spread betting
    • Advanced ProRealTime trading platform
    • Commissions up to £3 for direct ETF trading
    There is no guarantee you will make money with this provider.

    ETF Trading Fees

    To give you an idea of the kind of fees you can expect when trading ETFs, here’s a look at how the top ETF trading platforms compare to each other in terms of charges.

    ETF Broker Commission Deposit Fees Inactivity Fee Withdrawal Fee
    eToro £0 if buying and selling, variable spread for CFDs 0.5% currency conversion $10 per month after one year $5
    Plus500 Variable spread £0 £10 per quarter after 3 months £0
    Capital.com Variable spread £0 £0 £0
    AvaTrade Variable spread £0 Flat £50 after 3 months, £100 after one year £0
    IG £0-£10 if buying and selling, variable spread for CFDs Free (0.5%-1% on credit cards) £12 per month after 2 years £0


    ETF Trading Pros & Cons

    Pros:

    • Invest in a wide range of assets in one trade
    • Suitable for stock, index, forex, bond, and commodity trading
    • Buy and sell ETFs on the open market
    • Trade ETF CFDs with leverage
    • Often commission-free or low-cost trading

    Cons:

    • Many ETFs charge management fees
    • Not all ETFs are well diversified
    • ETF price movements can be complex

    How to Start Trading ETFs

    Want to start trading ETFs in the UK? We’ll show you how to get started using eToro, which offers commission-free trading for both ETFs and ETF CFDs.

    Step 1: Open a Brokerage Account

    The first step to start trading ETFs is to open a new brokerage account. Head to eToro’s homepage and click ‘Join Now’. Then enter a new username and password for your account and fill in details like your name and email. Create an eToro account

    You’ll also need to verify your identity to comply with government regulations. You can complete this step online by uploading a copy of your passport or driver’s license and a copy of a recent utility bill or bank statement.

    Step 2: Deposit Funds

    eToro requires a minimum deposit of £140 when you sign up for a new account. You can make a payment using a debit or credit card, through an e-wallet like Neteller or Skrill, or by bank transfer. Debit, credit, and e-wallet funds are available for trading immediately.

    Step 3: Place Your First ETF Trade

    Now you’re ready to buy and sell ETFs. Search for an ETF by name or browse ETFs on eToro’s market dashboard. Once you’ve found the ETF you want, click ‘Trade’.How to trade ETFs on eToro

    In the order form that appears, enter how much money you want to trade. If you’re trading CFDs, you can also specify whether to apply leverage to your trade. We recommend setting a stop loss for your order as well to help manage trading risk.

    When your order is ready, click ‘Trade’ to complete your first ETF trade.

    Conclusion

    ETF trading in the UK is a great way to get financial exposure to a wide range of assets at once. By trading ETFs, you can minimize your risk to any single stock, commodity, or currency, yet still speculate on price changes in these markets. Better yet, ETFs are traded on the stock market, so they’re easy to access and you don’t need a huge amount of money to start trading.

    Ready to jump into ETF trading in the UK? Open an eToro account today to get started!

    eToro: Trade ETFs with 0% Commission

    Our Rating

    • Zero commission & tight spreads
    • Buy ETFs or trade CFDs
    • Social & copy trading
    • Accepts PayPal
    • FCA regulated
    75% of retail investor accounts lose money when trading CFDs with this provider.

    FAQs

    What is ETF options trading?

    You can trade options for ETFs just as you would trade options for stocks. Options expire at a specified date, so you are speculating on the timing as well as direction of a price change. Options trading is best suited for advanced traders.

    What are the ETF trading rules?

    ETF trading follows many of the same rules as stock trading. ETF trading in the UK is subject to a stamp tax, and profits from ETF trading are subject to capital gains tax.

    Can you collect dividend when trading ETFs?

    Yes. If you are trading ETFs that contain shares of dividend stocks, you are eligible to collect dividends.

    Should I trade ETFs or ETF CFDs?

    Direct ETF trading is generally best for medium- to long-term investing. ETF CFDs are best for day trading and for trading with leverage.

    Are ETFs better than mutual funds?

    ETFs are more accessible and cheaper than mutual funds in most cases. ETFs can be bought on the stock market, don’t require a minimum investment, and typically have lower annual management fees.

    All trading carries risk. Views expressed are those of the writers only. Past performance is no guarantee of future results. The opinions expressed in this Site do not constitute investment advice and independent financial advice should be sought where appropriate. This website is free for you to use but we may receive commission from the companies we feature on this site.
    Michael Graw

    Michael is a writer covering finance, new markets, and business services in the US and UK. His work has been published in leading online outlets and magazines.