The core tradeoff: leverage versus total cost
An index ETF gives you proportional exposure to an index at a fixed cost—management fees of 0.03–0.20% annually, no overnight financing, no margin requirement. An index CFD gives you leveraged exposure with a fraction of the capital, but you pay overnight swap fees for every day you hold. For short-term tactical positions under a week, the CFD is often cheaper. For holds beyond two weeks, the ETF almost always wins on total cost.
Cost basis: a 30-day worked example
Assume you want £10,000 of FTSE 100 exposure for 30 days. Via iShares ISF ETF (0.07% TER), total cost is approximately £5.83 in management fees plus a one-way spread of roughly £3. Total: ~£9. Via CFD at 20:1 leverage, margin requirement is £500. Overnight swap at −0.025% per day on the full £10,000 notional equals £2.50/day × 30 days = £75, plus spread on entry and exit of ~£6. Total: ~£81. The ETF is approximately nine times cheaper to hold for one month.
Leverage changes the comparison entirely
The above comparison holds notional exposure constant at £10,000. If you deploy the same £500 in the ETF, you get £500 of exposure. The CFD gives you £10,000. If the FTSE rises 5%, the ETF gains £25 on your £500; the CFD gains £500—a 100% return on margin before financing. The inverse is equally true: a 5% fall wipes your CFD margin entirely. Leverage is the reason traders use index CFDs, not cost efficiency.
UK tax treatment
In the UK, both ETF and CFD profits are subject to Capital Gains Tax. ETFs held inside an ISA are entirely CGT-free; CFDs cannot be held in an ISA. The annual CGT exemption of £3,000 (2025/26) applies to both structures. CFD losses can be offset against other CGT gains in the same tax year. For a retail trader with gains under the exemption threshold, the ETF's ISA wrapper is a significant structural advantage.
EU and offshore tax treatment
Germany taxes both ETF and CFD gains under Abgeltungsteuer at 25% plus solidarity surcharge. Equity ETFs benefit from the 30% Teilfreistellung exemption; CFDs have no equivalent. French traders face a flat 30% PFU on both, with no ETF-specific relief. In zero-CGT jurisdictions—UAE, several Gulf states—there is no tax difference, making CFDs attractive purely on capital efficiency: a £100,000 index position held with £5,000 of margin leaves £95,000 free to deploy elsewhere.
When to use each instrument
Use index CFDs for intraday or short-term directional trades, hedging an existing equity portfolio, or when leverage is the primary objective. Use ETFs for long-term exposure, ISA-sheltered UK holdings, cost-sensitive holds beyond two weeks, or when you want a clean position in a regulated wrapper. Most active traders use both: CFDs for tactical positions, ETFs for structural allocation.