Understand how ETFs can offer diversified exposure to a range of equities and be easily traded like stocks.
An ETF is an investment fund listed and traded on the stock exchange. It is usually made up of assets linked by a similar investment profile. It aims to produce returns that reflect the performance of a specific benchmark index or its underlying assets.
Many ETFs track an index such as a stock, bond or commodity index. Their prices can fluctuate with demand and supply throughout the day. They may be adjusted from time to time to reflect the latest composition of assets that make up the index.
These may be further sub-classified into Developed Markets ETFs, Emerging Markets ETFs and industry ETFs.
These identify one or more investment themes, then build a quantitative model for the asset selection and have stocks in that index re-weighted according to the model.
These allow investment in bonds at a scale and cost typically enjoyed by institutional investors only.
These invest in physical commodities such as agricultural goods, natural resources and precious metals.
ETFs require lower cash outlay than buying individual stocks to build a similar portfolio as an index. As most ETFs are passively managed, the fees and charges are generally lower than actively managed funds.
ETFs allow you to spread your risks across various stocks and markets, lowering risk exposure and volatility.
Access to blue-chip stocks and foreign markets
ETFs that track indices such as the STI and S&P 500 allow you to invest in blue-chip stocks and gain exposure to foreign markets.
Ease of trading
Buying an ETF is as simple as buying a listed stock.
Adverse market condition can affect the price of the underlying stock components, reducing the value of the ETF.
The fund manager may not be able to perfectly replicate the performance of the index which the ETF tracks.
Foreign exchange rates risk
ETFs priced in a foreign currency are exposed to fluctuations in foreign exchange rates. This can potentially increase or erode returns.
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