A beginner’s guide to ETFs (Part 1)
Looking for a financial product that is easy to trade like a stock, yet offers diversified exposure like a unit trust? Welcome to the world of Exchange Traded Funds (ETFs), a type of investment fund that is listed and traded on stock exchanges.
How does an ETF work?
Usually, ETFs are made up of a collection of assets that are linked by a similar investment profile. Many ETFs track a particular index, such as a stock, bond, or commodity index. They aim to produce a return that reflects the performance of the specific benchmark or underlying assets.
For example, the SPDR (Standard & Poor’s depository receipt) Straits Times Index ETF track the Singapore Straits Times Index (STI), which is essentially the benchmark index for the Singapore stock market. When you buy this particular ETF, you are effectively gaining exposure to Singapore’s 30 largest companies (by market capitalisation), such as DBS Group Holdings, Singapore Airlines, Singapore Press Holdings, and others that are listed on the Singapore exchange.
Why buy ETFs?
Investing in ETFs is an efficient way to diversify your exposure without the need to buy individual stocks or bonds to build a similar portfolio as the benchmark index. Because ETFs are predominantly passively managed, the associated fees are usually lower than those associated with unit trusts.
You will have access to real-time information and prices on your portfolio, and you will know exactly what stocks or assets are included in the ETF you invest. Additionally, you get access to established blue-chip investments, as it is included in certain indices’ ETFs, such as those of STI and S&P 500.
What are the returns?
Like stocks, the return on an ETF depends on capital gain, when the price of the ETF units increase above the purchase price.
Investors may also be paid dividends from the underlying stocks, which are collected by the fund manager and redistributed to investors on a quarterly or semi-annual basis. ETF fund managers will determine if dividends are better re-invested or distributed as income to investors. Dividends are paid out in the same way as stocks. However, it is important to note that not all ETFs pay dividends.
How do you buy an ETF?
Buying an ETF is as simple as buying a listed stock. You can buy or sell ETFs either through your broker, or via an online trading account, such as the DBS Vickers online/mobile platform. DBS Vickers allows you to buy and sell anytime during market trading hours, while you gain access to an extensive array of markets and asset classes. On top of that, it provides safekeeping services for both local and foreign ETF investments, ensuring that your assets are kept safe and untouched with the institution.
Watch the video below to understand how ETFs work:
Note: Customers can buy ETFs through both Vickers and Online Funds Investment platform. If they want to buy the ETF one-off, they do it through Vickers. If they want to buy it via a regular savings plan starting from $100/month, they need to do so via OFI.
It is important to gain a comprehensive understanding of what you are investing in. Read A Beginner’s Guide to ETFs: Part 2 on how to choose an ETF to invest in, the risks involved, and how you can tap on your CPF money to invest in ETFs.