Get up to speed with ETFs
Counting numerous investment gurus including Warren Buffet as fans, Exchange-Traded Funds (ETFs) have attracted much chatter in the market in recent years.
In just nine years from 2008, ETF assets increased more than six folds to stand at US$4.4 trillion – showing no signs of slowing down in the near future. While it seems like a profitable wave to ride, read on to see if ETFs are the right choice to take your portfolio further.
It pools money from a large number of investors and deploys it in a mix of stocks, bonds and different types of assets. It tracks one or more market indexes, which instantly provides diversification to your portfolio and helps spread your risk. They are traded easily like most stocks on the stock exchange.
Here are some key features that set it apart as an investment:
If you are looking for affordable diversification, ETFs might suit you. It allows you to expand your portfolio cost-effectively without having to pick individual stocks. For example, buying into an ETF that tracks the Singapore Straits Times Index will give you immediate exposure to Singapore’s top 30 stocks.
With ETFs, your investment is linked to an index like the STI which in turn means that your money is pegged to the wider economy. This allows you to ride on general market trends and avoid being exposed to the wider risk that is associated with selecting specific stocks.
In 2017, ETFs tracking the Singapore Straits Times Index had total expense ratios of around 0.3%. Conversely, expense ratios of mutual funds ranged between 1 – 2%. ETFs generally offer lower expense ratios because it is passively managed as an investment which means you pay less for administrative and management fees.
Many investors overlook this but the compound value of saving on mere percentage points in fees could result in significant returns in the long run.
There is a wide variety of ETFs that caters to different investor needs and risk profiles. Here are some basic types of ETFs that interest those keen on dipping their toes into this form of investment.
- Equity ETFs
Looking for: Instant exposure to a country, region, or an industry of your choice
This is a favourite with investors. It offers the ability to gain instant exposure to a particular country, a region, or an industry at a relatively low cost. However, do pay attention to the liquidity of your picks as that would affect the buy/sell price that you will have to give.
- Fixed-income ETFs
Looking for: Stability and regular income
Many investors looking for long-term exposure are advised to allocate a certain portion of thie funds to fixed-income securities such as bond ETFs. As This usually offers stability and a regular income. However, do note that liquidity could be an issue especially in developing markets.
- Commodity ETFs
Looking for: Diversification through other sectors
Commodity ETFs are available in a wide range of options. Some may invest in shares of companies that deal primarily in a mix of commodities, others may track the price of a specific commodity like gold or silver. This allows you to diversify your portfolio beyond the stock market.
Warren Buffet isn’t alone on this belief. ETFs offer an opportunity to get a slice of the whole market at an affordable price – that is why it has been recommended by numerous investment gurus as a sound choice for investors who would rather not trip up on making specific stock choices.
But before plunging headlong into this investment choice, it is still important to assess your portolio to define its long-term goal. With a wide variety of ETFs to choose from, understanding the nature and length of your investment will help you determine the right one for your portfolio.