What is the ETFplus market and how does it work?

In the modern investment era, Exchange Traded Funds (ETF) have gained increasing popularity due to their efficiency and flexibility. In Italy, the market dedicated to the trading of these instruments is ETFplus, managed by Borsa Italiana. This regulated market offers investors access to a wide range of financial products, including ETFs, Exchange Traded Commodities (ETC) and Exchange Traded Notes (ETN).

The structure and features of ETFplus have been designed to ensure transparency, liquidity and ease of access, making it a point of reference for those who want to diversify their portfolio with listed instruments. But how does it work? Here’s everything you need to know.

What is ETFplus?

ETFplus is the regulated electronic market of Borsa Italiana entirely dedicated to the real-time trading of financial instruments that replicate the performance of indices or individual raw materials. This includes:

• ETF (Exchange Traded Funds): funds or SICAVs with low management fees, traded on the stock exchange like normal shares, with the aim of faithfully replicating the performance of stock, bond or raw material indices;
• Structured ETFs: ETFs that use more complex strategies, such as leverage, to amplify returns or protect against possible market declines;
• Actively managed ETFs: ETFs in which managers make active investment decisions, with the aim of outperforming a benchmark index;
• ETC (Exchange Traded Commodities) and ETN (Exchange Traded Notes): financial instruments that passively replicate the performance of raw materials or other underlying assets other than raw materials, such as currency indices, stock indices or bond indices.

Segmentation and microstructure of the ETFplus market

To facilitate the selection of the instruments best suited to the risk-return profile of investors, ETFplus is divided into specific segments and classes:

Index ETF segment

• Class 1: ETFs whose reference index is of the bond type.
• Class 2: ETFs whose reference index is of the equity type.

Structured ETF segment

• Class 1: Structured ETFs without leverage effect.
• Class 2: Structured ETFs with leverage effect.

Actively managed ETF segment

• Class 1: fixed income.
• Class 2: equity.
• Class 3: structured.

ETC/ETN segment

• Class 1: ETC/ETN without leverage.
• Class 2: ETC/ETN with a maximum leverage of 2.
• Class 3: ETC/ETN with a leverage of more than 2.

This segmentation allows investors to precisely identify the instruments best suited to their needs and investment strategies.

How ETFplus works and trading hours

ETFplus operates as a multilateral market, based on an efficient electronic system that manages thousands of messages per second, ensuring rapid entry and cancellation of orders and automatic execution of contracts.

Trading hours (GMT+1, CEST) are structured as follows:

• opening auction: from 8:45 to 9:04, with a variable interval of up to 30 seconds, determined automatically on a random basis by the trading system;
• continuous trading: from 9:04 to 17:30;
• closing auction: from 17:30 to 17:35 plus an interval of up to 30 seconds, determined randomly by the system.

Contracts are concluded through the automatic matching of buy and sell proposals ordered according to price/time priority criteria. During continuous trading, proposals with a price limit or without a price limit can be entered.

As with shares, it is important to underline that in order to ensure the regular conduct of trading, maximum limits are set to price fluctuations. If the latter are not respected, a 2-minute volatility auction is activated.

The settlement of contracts is carried out on the second trading day following the execution of the contracts, which also benefit from the performance guarantee provided by the central counterparty. The minimum trading lot is one ETC/ETN.

Advantages of investing on ETFplus

Investing through ETFplus offers numerous advantages, making this platform a popular choice among retail and institutional investors.

• Diversification: ETFs replicate indices that represent a basket of stocks, bonds or commodities, allowing automatic diversification of the portfolio, reducing the specific risk linked to individual securities.
• Low management costs: compared to traditional mutual funds, ETFs have lower management fees thanks to their passive management.
• Transparency: ETFs publish the composition of their portfolios on a daily basis, allowing investors to know exactly what they are investing in.
• Liquidity: the presence of market makers guarantees low spreads and the ability to buy and sell at any time during trading hours.
• Tax efficiency: in Italy, ETFs enjoy favorable taxation compared to mutual funds, especially in terms of taxation on capital gains.

Possible risks for investors

As with any investment, ETFs are not free of risks.

• Market risk: ETFs replicate market indices, so their performance depends on general financial market conditions.
• Tracking error: some ETFs may not perfectly replicate the performance of the underlying index due to management costs or operational inefficiencies.
• Liquidity: While generally high, some less popular or sector ETFs may have wider bid-ask spreads.
• Currency Risk: ETFs that invest in instruments denominated in foreign currencies may be subject to currency fluctuations.

Original article published on Money.it Italy. Original title: Cos’è il mercato ETFplus e come funziona