ETFs explained: what an index fund holds and how it differs from an index CFD
The Sahm Markets team · 29 October 2026 · 6 min read · How we write
In short
- An ETF is a fund that trades like a share and holds a basket, often an index.
- Its yearly fee, the expense ratio, is usually far below CFD financing.
- Leveraged and inverse ETFs reset daily and behave differently over weeks.
An ETF, or exchange-traded fund, is a fund that trades on a stock exchange like a single share. One purchase can give exposure to hundreds of companies, a whole index, a sector, bonds or commodities. ETFs are among the most widely held products in the US market, and also among the most misunderstood by newer traders.
How an ETF works
The fund owns a basket of assets, for example every stock in the S&P 500, and issues shares that represent a slice of that basket. The ETF's price follows the value of what it holds through the trading day, kept in line by large institutions that can create or redeem shares in bulk. The fund charges an annual fee, the expense ratio, which is taken out of the fund's value gradually rather than billed to you.
Well-known US index ETFs
| ETF | Tracks | What you get |
|---|---|---|
| SPY, IVV, VOO | S&P 500 | About 500 large US companies |
| QQQ | Nasdaq-100 | 100 large non-financial Nasdaq companies |
| DIA | Dow Jones Industrial Average | The 30 Dow stocks |
| XLE | Energy sector of the S&P 500 | US oil and gas companies, not oil itself |
These names are listed as examples of how ETFs map to indices, not as suggestions to buy any of them.
ETF vs index CFD
Both follow the same index, but they work very differently.
| Index ETF (bought outright) | Index CFD (US500, US100) | |
|---|---|---|
| What you hold | Fund shares, a real asset | A contract with the broker |
| Leverage | None on a cash account | Yes |
| Trading hours | Mainly the US session, plus extended hours | Often almost 23 hours a day |
| Holding cost | The expense ratio, often a fraction of 1% a year | Nightly financing on the full position |
| Dividends | Paid out by the fund (or reinvested) | Cash adjustments |
The cost difference over time
Worked example. A $10,000 position held for one year. An index ETF with a 0.10% expense ratio costs about $10 in fees for the year. A leveraged CFD of the same size, charged financing at, say, 7% a year, costs about $700 before the spread.
Illustrative calculation, not an expectation of results. The financing rate in the example is an assumption; each broker publishes its own. This gap is why ETFs are generally the tool for long holding periods and CFDs for short ones, a theme covered in stocks vs CFDs on stocks.
Leveraged and inverse ETFs: a special case
Some ETFs aim for two or three times the daily move of an index, or its opposite. Because they reset every day, their result over weeks can differ widely from two or three times the index's move, especially in choppy markets. Their own documents describe them as short-term instruments. Beginners often mistake them for a simple multiplied index.
Questions to ask about any ETF
- What exactly does it track, and how closely has it followed that index?
- What is the expense ratio?
- How liquid is it: what is the usual spread during the US session?
- Does it hold the assets directly, or use derivatives?
- In which country is it domiciled, and what tax applies to its dividends for a non-US holder?
Checking a trade before placing it
Whatever the product, the risk side is the same: where the exit would be if the idea is wrong, and what that costs. The risk-reward calculator compares the two, and the market sessions tool shows when the US session is open in Gulf time.
In short
An ETF is a fund that trades like a share and tracks a basket, often an index. It usually costs little to hold and carries no leverage on a cash account, which makes it a different tool from an index CFD, built for different holding periods.
Questions people also ask
Is an ETF a stock?
It trades like one, on an exchange with a ticker and a live price, but each share represents a slice of a fund that holds many assets.
What is an expense ratio?
The fund's annual running cost as a percentage of its assets. It is deducted gradually from the fund's value; a 0.10% ratio costs about $10 a year on $10,000.
Do leveraged ETFs give three times the index return?
Only over a single day. Because they reset daily, their result over longer periods can differ widely from three times the index's move, especially in choppy markets.
Take the quiz and find your trader profile.
Take the quizTrading financial markets carries a high level of risk and can result in the loss of all the money you invest. Sahm Markets content is for education only and is not investment advice. Past results do not guarantee future results.