Investing with only ETFs
If you don’t have time to read through the whole article, you can check out a summary below:
- Exchange-traded funds (ETFs) allow you to build up diversity in your investment portfolio with relative ease to capture broad-based performance of a particular market
- Using a combination of ETFs can be an easier or hassle-free way to construct a portfolio
- Do remember to do your due diligence and do not rush into selecting ETFs when building up your portfolio
For the regular Joe (or Jane), building up an investment portfolio can be an arduous task. This is because there is much research to be done on individual companies and sectors. You also have to align it with your risk appetite, take note of the changing economic conditions and consider how they affect the stocks you have picked.
But for those who would like to try their hand at building their own investment portfolio, using a combination of exchange-traded funds (ETFs) might be an easier or hassle-free way to construct a portfolio.
In the past decade, ETFs have grown in popularity among retail investors for a number of reasons:
Diversification across stock markets and sectors
ETFs allow you to build diversity in your investment portfolio with relative ease as many track benchmark indices like the S&P 500 or the Straits Times Index (STI).
This allows you to capture broad-based performance of a particular market. An ETF can also mitigate the level of volatility (to a certain extent) if some stocks within an ETF fall.
If you are looking for a more defined exposure, ETFs are available for sub-indices and sectors. A sub-index tracks the performance of a group of securities that form part of a larger index like the S&P 500 or STI. They are often based on certain common sub-characteristics like a sector (i.e. Financials, Technology).
Alternatively, if you would like to capture growth opportunities of larger technology firms across different geographies/markets, you can look at a technology ETF with global exposure. This allows you to diversify by investing in a group of technology stocks instead of one company, thereby removing company-specific risk.
By allowing investors to diversify their portfolios without having to put in more time and effort, it is easy to see why ETFs are growing in popularity.
Diversification across other asset classes
ETFs provide diversified access to other asset classes like bonds and alternatives like gold and silver, currencies and real estate.
In the case of bonds, which may be difficult for a retail investor to acquire, there are bond ETFs tracking investment grade corporate bonds, among others. There are also ETFs that comprise a mix of asset classes like bonds and stocks.
For those looking to invest in gold or other precious metals, they can gain exposure to this asset class through ETFs that track either one particular metal or a basket of precious metals.
ETFs are also available for those looking to tap growth opportunities in secular trends. For example, there are ETFs in the market covering investment themes such as Green Energy and even e-Sports.
Relatively low costs
Compared to actively managed funds like unit trusts (UTs), ETFs are comparatively cheaper as they are passively managed. Passively managed funds are those where the stocks and bonds chosen as part of the fund are selected by the portfolio manager to match an index or sector.
As most ETFs are not actively managed, fees incurred to hold them are often lower than UTs.
ETFs suit investors who are not trying to get better returns than the underlying index – that is, people who are happy with matching the index in returns performance. In addition, this makes them a viable alternative, especially if higher cost UTs are unable to beat an index or sector average.
Given that ETFs trade like stocks, they offer higher liquidity and transparency than UTs. ETFs trade on stock exchanges which means they can be bought and sold anytime during trading hours and not just at the end of the day (like in the case UTs).
This can be an important consideration when volatility is high or in cases when an investor has found an opportunity to add more of a particular ETF into a portfolio.
That said, not all ETFs have the same level of liquidity. At the end of the day, the liquidity of an ETF depends on how liquid the shares it holds are, the trading volume of the ETF and the investment climate.
Steps for building an ETF Portfolio
If you are considering building a portfolio with ETFs, here are some simple guidelines to help you on your journey:
Creating an appropriate mix
As an individual investor, you need to know how to determine an asset allocation that best conforms to your personal investment goals and risk tolerance. In other words, your portfolio should meet your future capital requirements and give you peace of mind while doing so.
Generally speaking, younger investors – who tend to have a longer time horizon – often take on higher amounts of risk while older investors steer toward lower-risk investing.
Below is an example of an asset allocation for a balanced portfolio. This is a portfolio for investors that seek to capture modest capital growth through a balanced risk-and-return approach. This is considered a middle-ground option for those building an investment portfolio.
For balanced portfolios like the above, ETFs can be purchased in accordance with the proportions of funds allocated to each asset class. Cash is often set aside for further investments.
Putting your strategy in play
Given that ETFs open your opportunities to conveniently holding various financial instruments, you can select ETFs according to the index and sectors to meet your desired asset allocation targets.
Taking the approach of building an all-ETF balanced portfolio, we illustrate the example of John and Jane’s portfolios* below:
|NikkoAM Singapore STI ETF||25% ($2,500)|
|NikkoAM-Straits Trading Asia ex Japan REIT ETF||25% ($2,500)|
|ABF Singapore Bond Index Fund||16% ($1,600)|
|NikkoAM SGD IG Corp Bond ETF||16% ($1,600)|
|GLD US$ ETF||11% ($1,100)|
|NikkoAM Singapore STI ETF||20% ($2,000)|
|NikkoAM-Straits Trading Asia ex Japan REIT ETF||10% ($1,000)|
|Xtrackers MSCI China UCITS ETF||5% ($500)|
|Lion-OCBC Hang Seng TECH ETF||5% ($500)|
|ABF Singapore Bond Index Fund||12% ($1,200)|
|NikkoAM SGD IG Corp Bond ETF||12% ($1,200)|
|NikkoAM-ICBCSG China Bond ETF||6% ($600)|
|ICBC CSOP CGB ETF||6% ($600)|
|GLD US$ ETF||11% ($1,100)|
*The above table illustrates two examples of what investors can do with to build an investment portfolio. This should not be relied on as investment advice. Investors should do their own due diligence.
Both John and Jane are first-time investors who each have $10,000 available for investment.
They want to deploy their funds into ETFs but have an entry level understanding, which is why they have selected only ETFs which are considered Excluded Investment Products (EIPs). EIPs are generally for investors who expect low to moderate likelihood of loss of principal investment amount, with generally smaller potential returns.
Due to their relative inexperience in investing, they are not as confident in purchasing ETFs that are considered Specified Investment Products (SIPs). SIPs tend to be more complexed product and may not be suited to first time investors.
As such, the Monetary Authority of Singapore (MAS) has classified certain investments as SIPs and requires financial institutions to assess the investor's investment knowledge and experience before selling SIPs to the investor.
John is a first-time investor who has $10,000 available for investment but has little understanding of global markets. He is more familiar with Singapore-listed companies and Reits.
Adopting a balanced asset allocation to portfolio construction, John has chosen to invest his funds entirely in Singapore-focused ETFs first. While there is a concentration risk – John’s investments have a high exposure to Singapore - John intends to build up his investment knowledge and purchase ETFs that cover other markets in the near future.
Jane is a first-time investor who has $10,000 available for investment but unlike John, she has more knowledge on global markets.
She has also taken a balanced asset allocation to portfolio construction, with a focus on Singapore- and Greater China-listed companies and Reits. Like John, Jane intends to build up her investment knowledge and purchase ETFs that cover other markets and sectors in the near future.
ETFs have become so popular because of the many advantages they offer to retail investors. Still, you must always bear in mind that they aren't without risks. Only then will you be able to plan around the risks, to take full advantage of the benefits.
There are thousands of ETFs available globally, it can be a daunting task for a first-time investor to select what suits best. Do remember to do your due diligence and do not rush into selecting ETFs.
Since timing is important when buying and selling ETFs and stocks, you might not want to buy all the ETFs for your portfolio at once. You can opt to buy the more attractively valued ones first while keeping an eye for a pullback to purchase others.
If you are a long-term investor, you can purchase your desired ETFs over a period of three to six months.
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Disclaimers and Important Notice
This article is meant for information only and should not be relied upon as financial advice. Before making any decision to buy, sell or hold any investment or insurance product, you should seek advice from a financial adviser regarding its suitability.
All investments come with risks and you can lose money on your investment. Invest only if you understand and can monitor your investment. Diversify your investments and avoid investing a large portion of your money in a single product issuer.
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