How can CFDs fit into your portfolio?

Head of CMC Markets Canada on the benefits of the OTC investment vehicle

How can CFDs fit into your portfolio?

It’s a niche product but a CFD (contracts for difference) broker believes the OTC vehicle is the ideal portfolio supplement for investors who want a more short-term, speculative trade.

Michael Yeung, head of CMC Markets Canada, said it’s a powerful investment tool that allows clients to trade underlying assets they would typically have difficulty accessing at a low cost.

Rather than buying traditional shares that go on an exchange, it offers people an online portal to trade CFDs. Yeung said the benefit is that instead of buying an ETF that tries to track, say oil, a CFD is closer to actually buying crude.

He said: “With an CFD you are buying it by the barrel. You specify the amount in barrels and either go long or go short. The price you see on our platform would be the same that you hear on the news.

“You are not buying an ETF which has irrelevant price, you are buying at exactly what you think and hear, for example, if you think oil is going to go to $80 a barrel.”

Yeung, who said he has about 5% of his personal money in CFDs and assesses his position weekly, said investors have to be careful with finding a reputable broker – there are about five now in Canada. He also warned that clients should be comfortable with the fact the product is 20x leveraged and not mass market, meaning you can magnify your returns but also your losses as well.

He said: “It’s for those looking for a more speculative trade so it could be a swing trade or a day trade, not for your typical investors. It wouldn’t be in any registered account – it’s something that supplements most people’s portfolio and it’s used for speculative trading.”

The fees, he said, are broker dependent but typically cost effective. There are overnight holding costs but, because of the leverage, a return over 3% is generally beneficial. Many fees are spread based, with oil costing 3 cents for every barrel traded, for example.

Yeung said that typically for his client base, people will hold CFDs for anything from a day trade to a month or a month and a half, with modern technology making it easy to track.

He said: “I’m quite a typical investor so I have some savings; some in real estate, I have them in registered accounts, my TFSA, but then I have an account such as ours – and everyone is different – where I put maybe 5% into an account like this and use it for quite speculative trading.

“This timeline works for me because I don’t have time to be on it every single day – I have a day job! It’s very convenient to monitor and look at because technology has moved on so much. My profits and stop losses hit at what I set so there is very little surprise.

“Obviously I’m a bit more savvy than most people but I don’t think my risk appetite is too far off a typical investor or someone who has a portfolio.”