What is an ETF?

The word ETF stands for Exchange-Traded Fund. An exchange-traded fund is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. Throughout the trading day, they trade close to the net asset value.

Increasing numbers of investors are employing exchange-traded funds (ETFs) to build varied portfolios. Consider if you should take it on as well – if you understand the risk/reward trade-offs.

Shareholders do not own any underlying assets of the fund but own shares in it. This type of investment vehicle has become popular in recent years because it has lower fees than mutual funds, and many are tax-efficient.

What are the three types of ETFs?

There are three types of ETFs: Index Funds, Tracking stock and being actively managed. Most ETFs are index funds, which require the least amount of research and monitoring because the fund merely follows an index. Actively managed ETFs make investment decisions like mutual funds do. They may also produce capital gains, which means trading in and out of positions to maximize profit.

The advantages of investing in ETFs?

The advantages of investing in ETFs are endless. They offer diversification, low expense ratios, fast trade executions, tax efficiency, and liquidity. Diversification is when a single investor owns more than one stock or asset, reducing risk because losses or gains incurred in one security can be offset by gains or losses in another. Low expense ratios mean lower management fees for things like research and transaction costs.

Fast trade executions mean that exchanges are completed so investors can buy or sell their shares throughout the day. Tax efficiency means taxes are incurred only when necessary instead of tacked on at the end of each quarter. Lastly, liquidity allows for easy buying and selling of ETFs with minimal impact on the price.

What are the disadvantages of ETFs?

The disadvantages of ETFs include tracking errors, limited portfolio choice, susceptibility to market volatility, and potential for fraud tracking error. It could be because of high fees, large bid-ask spreads, the differences between what people are willing to pay for a share and what someone is trying to sell it for, management errors, or poor selection/availability of securities.

ETFs are so popular because most people believe they offer low fees compared to mutual funds and hedge funds, but this isn’t exactly true. Often, the expense ratios on ETFs aren’t all that impressive when you compare them to traditional mutual funds or index funds, which means investors may wind up paying more than expected for their investments.

What are the most popular types of ETF?

The most popular type of ETF is an index fund that tracks a primary stock market index such as the Dow Jones Industrial Average. These funds usually have very low expense ratios ranging between 0.1% and 0.5%, much lower than typical mutual funds of 2.5% or more, and can be purchased for as little as $100 each.

ETF trading in Singapore

Since the introduction of the ETF in Singapore in 2008, its popularity has grown steadily. Today, there are many different types of ETFs on offer. Most popular among them include:

  • iShares MSCI Index Fund (E300)
  • Nikko AM STI ETF (G3B)

These three funds have an average daily trading volume of above 50% amongst all 1350 ETFs listed on the stock exchange of Singapore. To date, more than 10 billion USD worth of investments have been made through these three funds alone. The most significant increase in trading volumes was around June 2011, when various authorized dealers introduced these funds to their clients.

In Summary

ETFs are a great product; they enable you to invest in many assets without the high costs and barriers associated with investing in individual products. We suggest trying a demo account offered by the Saxo bank group before making a real money investment for new investors.