Investing in ETFs

11
1295

Exchange-traded funds (ETFs) are investment funds that aim to track the performance (value or price) of an index, a particular commodity or a group of commodities , or other financial products. For example, by purchasing shares of the DBS Singapore STI ETF, you are effectively investing in the 30 stocks (e.g. Singapore Telecommunications, Wilmar International, DBS Group, etc.) tracked by the STI (Straits Times Index).

Like other funds (unit trusts, mutual funds, etc.), ETFs invest in a portfolio of stocks, giving you, as an investor, access to a wide range of markets, sectors and asset classes. Unlike unit trusts, however, ETFs are publicly traded and are subject to brokerage commissions, just like stocks on the stock exchange. (Trust units must be traded through a fund manager and are generally subject to a management fee and / or sales charge.)

ETFs come in many forms, including:

Obligations– Hold or track the performance of a basket of bonds (e.g. Singapore government bonds)

Actions– Own or track the performance of a basket of stocks (e.g. stocks of Singaporean companies; companies from emerging economies; global companies)

Basic products – Hold or track the price of a single product or basket of products (e.g. gold, silver, metals)

Currencies– Follow a main currency (eg euro)

In the United States, there are ETFs that represent almost every sector of the market: stock market indices like the Dow 30 or the S&P 500; equity sectors such as healthcare, retail and technology; and commodity sectors such as agricultural products, gold or petroleum. There are ETFs for large corporations, small businesses, real estate investment trusts, international stocks, bonds, and even gold and silver. Today there are also synthetic ETFs that use financial derivatives to mimic the performance of other ETFs, although these would not be suitable for the average investor due to more sophisticated financial literacy. involved.

There are several advantages and disadvantages associated with ETFs

Advantages of ETFs

Flexibility and transparency – ETFs are listed products: since they are listed on a stock exchange their prices are known throughout the trading day and they can be bought and sold the same way you buy and sell

stocks (online or through your broker), during local trading hours.

Risk diversification – ETFs allow you to achieve a certain degree of diversification: you gain access to several

markets in a single transaction, with a minimum investment and via a single platform.

Low expenses– Total expenses of ETFs (0.3 to 1%) are generally lower than those of unit trusts (1.5 to 3%); in fact, they are

typically 0.65% in Singapore and even less in the United States.

Disadvantages of ETFs

Existence of trading fees – You have to pay brokerage commissions to buy and sell ETFs, which makes ETFs more suitable for single, flat-rate investments than for regular small investments. Invest in ETFs

ETF in Singapore

Here are some quick facts about ETF trading in Singapore:

• As of February 2011, Singapore had 75 ETFs with approximately S $ 3.2 billion (S $ 3,200,000,000) of assets listed on SGX, the Singapore Stock Exchange. For comparison, the Asia-Pacific region (excluding Japan) had around 190 ETFs with around A $ 52.5 billion in assets at the end of 2010, while the United States alone had around 1,100 ETFs with over US $ 1

Trillion (S $ 1,270,000,000,000) in assets by February 2011.

• SGX has:

»Country ETFs for Singapore (3 ETF), Australia (1), Brazil (1), China (6), India (5), Japan (3), Malaysia (2) and Russia (2), among others;

»Regional ETFs, including those in the Asia-Pacific region (5), emerging markets (4) and global markets (2);

»Commodity ETFs for a large basket of commodities (5) and gold (1);

»ETFs for fixed income instruments (mainly bonds) and money market instruments.

• In January 2011, ETFs only accounted for 1.5% of SGX trading volume, compared to 14% in Europe and 40% in the United States. However, the growth has been spectacular: the volume of ETFs on SGX in 2010 was 45% higher than the volume of 2009.

• You can currently use your CPF savings to invest in 3 ETFs:

»ABF Singapore Bond Index Fund;

»StreetTRACKS Straits Times Index Fund;

»SPDR Gold Shares Trust.

• ETFs can be traded through your usual SGX listed securities brokers; the usual commission rate between 0.18 and 0.28%, depending on the amount, applies.

Conclusion

ETFs are best seen as combining the risk diversification of unit trusts with the flexibility of stocks. They are a practical implementation of the philosophy of index investing that minimizes the selection of individual stocks in favor of the selection of sectors, markets or geographic regions.

However, you should understand that, like any investment, ETF investments come with risk. Diversify even when you invest in ETFs. We suggest that you split your ETF investments between Precious Metals ETF, STI ETF, Income ETF, Emerging Markets ETF, and Developed / Global Economies ETF. This diverse portfolio is well within the means of the average Singaporean investor.

Finally, the fact that ETFs are publicly traded means that investment strategies (e.g. a longer term, buy and hold approach) and trading strategies (e.g. a shorter-term, more active strategy of buying when low and selling when approaching high) becomes possible.

Warning: Traders Round Table does not have any interest, financial or otherwise, in any of the mentioned ETFs or in any fund management company; the names have only been mentioned to make the examples easier to understand.

Further reading

• ETF assets and quotes in Asia-Pacific ex-Japan continue to grow (Professional Adviser)

• Growth of ETF trading in Singapore (Channel NewsAsia)

• Exchange traded funds (SGX)

• Exchange traded fund (Wikipedia)


Comments are closed.