Understanding Exchange-Traded Funds

At a Glance

Ease of trading

Just like individual stocks, ETFs trade on exchanges, giving flexibility to buy or sell anytime during market hours.

Portfolio exposure

ETFs provide exposure to different asset classes, markets and sectors without having to invest in individual stocks.

Risk Diversification

An ETF holds several underlying securities, thereby spreading risk across various assets and lowering both risk exposure and volatility.

What are ETFs?Exchange-Traded Funds (ETFs) are pooled investment funds that hold a diverse range of underlying assets and are traded on exchanges, just like stocks. For individual investors, ETFs offer a diversified and efficient way to invest across various asset types, markets, and industry sectors.Investors can earn returns from ETFs through:Price Appreciation: Like stocks, ETFs can increase in value, leading to capital gains when sold above their purchase price.Dividends: Some ETFs distribute dividends from their underlying holdings, often on a quarterly or semi-annual basis. It's important to note that not all ETFs pay dividends.In Singapore, there is no tax imposed on capital gains from the sale of shares or on dividends received.

How to Invest in ETFs?Depending on your objective or diversification strategy, you can purchase ETFs to get exposure based on specific:

Geography
country-specific or developed/emerging markets

Industry/Sector
energy, technology or healthcare

Asset type
stocks, bonds or commodities

In Singapore specifically, there are 2 types of ETFs – Excluded Investment Products (EIP) and Specified Investment Products (SIP):

EIP-ETFs
Less complex and generally suitable for retail investors with some understanding of financial instruments.

SIP-ETFs
These ETFs contain derivative products, which have complex features and higher risks. In order to invest in them, an investor must undertake a “Customer Account Review (CAR)” to assess your knowledge/experience and understanding of the product features/risks.

Find out more

Types of ETFs

The largest asset class in the ETF market, these invest in a diversified basket of equities.

Examples: SPDR STI ETF (Ticker: S27) and Amova STI ETF (Ticker: G3B)

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.

Offers diversified exposure to the bonds asset class. They are suitable for investors seeking regular income stream and lower price volatility as compared to Equity ETFs.

Examples: ABF Singapore Bond Index Fund (Ticker: A35) and Vanguard Total Bond Market ETF (Ticker: BND)

Provides investors to gain exposure to the price movements of raw materials without needing to own or store the actual physical assets.

Examples: SPDR Gold Shares (Ticker: GLD) and iShare Silver Trust (Ticker: SLV)

Adding ETFs into your investment portfolioWays that you can add ETFs as part of your investment portfolio

An ETF-Ready Portfolio
These ready-made portfolios, curated by investment experts, are often thematic and include up to 10 or more ETFs for diversified exposure. They are actively monitored and rebalanced to optimise performance as market conditions evolve.

These portfolio generally cost less than if one attempts to replicate the same underlying assets independently.

Lump Sum Investment
This involves with deploying a substantial amount of capital to purchase shares of an ETF at once, aiming to capture significant exposure in the market and potential long-term growth

Dollar-cost averaging (DCA)
This investment approach means committing to set aside a fixed sum monthly to a selected ETF. This disciplined method enables the steady building of a portfolio over time.

Benefits & Risks of investing in ETFs

Benefits

Cost effective	ETFs generally require a lower capital outlay than constructing a similar index-tracking portfolio with individual stocks. Most ETFs are passively managed, leading to typically lower annual expense ratios compared to actively managed mutual funds.
Diversification	An ETF can hold numerous underlying securities, spreading risk across many assets and reducing overall risk exposure and volatility.
Liquidity	Unlike active mutual funds, ETFs are exchange-listed, offering intraday liquidity and ease of buying or selling shares.
Transperency	ETFs typically disclose their holdings and Net Asset Value (NAV) daily, providing comprehensive transparency into the fund's underlying assets.
Ease of Trading	ETFs provide a convenient way to access international and regional markets, such as the STI and S&P 500, enabling exposure to blue-chip stocks and foreign markets.

Risks

Market risk	Adverse market conditions can affect the price of an ETF's underlying stock components, thereby reducing the ETF's value.
Tracking error	A fund manager may not perfectly replicate the performance of the index an ETF tracks.
Foreign exchange rates risk	ETFs priced in a foreign currency are exposed to fluctuations in foreign exchange rates, which can impact potential returns (increase or decrease).