Exchange-Traded Funds (ETFs) are investment funds that aim to track the performance (value or price) of an index, a particular commodity or a group of commodities, or other financial products. For example, by buying shares of the DBS Singapore STI ETF you are effectively investing in the 30 stocks (ie, Singapore Telecommunications, Wilmar International, DBS Group, etc) that are tracked by the STI (Straits Times Index).
Like other funds (Unit Trusts, Mutual Funds, etc), ETFs invest in a portfolio of stocks, thus providing you, as the investor, access to a wide range of markets, sectors and asset classes. Unlike unit trusts, however, ETFs are listed on stock exchanges and are subject to brokerage contracts, just like shares on stock exchanges. (Unit trusts must be transacted through a fund manager, and are usually subject to management fees and / or sales charges.)
ETFs come in many different forms, including:
Bonds – Hold, or track the performance of, a basket of bonds (eg Singapore government bonds)
Equities – Hold, or track the performance of, a basket of stocks (eg stocks of Singapore companies; emerging economies; globalompanies)
Commodities – Hold, or track the price of, a single commodity or basket of commodities (eg gold, silver, metals)
Currencies – Track a major currency (eg Euro)
In the US, there are ETFs that represent almost every sector of the market: stock indexes such as the Dow 30 or S & P 500; stock sectors such as healthcare, retail and technology; and commodity sectors such as agricultural products, gold or oil. There are ETFs for large companies, small companies, real estate investment trusts, international stocks, bonds and even gold and silver. Today there are also synthetic ETFs that use financial derivatives to mimic the performance of other ETFs, although these would not be suitable for the average investor because of the more sophisticated financial knowledge involved.
There are several advantaged and disadvantages associated with ETFs
Advantages of ETFs
Flexibility and Transparency – ETFs are publicly-traded products: since they are listed on exchanges, their prices are known throughout the trading day and they can be bought and sold the same way you buy and sell
shares (online or via your broker), during local trading hours.
Risk Diversification – ETFs allow you to achieve some degree of diversification: you gain access to multiple
markets in a single transaction, with minimum investment and via a single platform.
Low Expenses – Total expenses for ETFs (0.3-1%) are usually lower than for trusts (1.5-3%); in fact, they are
typically 0.65% in Singapore and even lower in the US.
Disadvantages of ETFs
Existence of Trading Costs – You must pay brokerage contracts to buy and sell ETFs, making ETFs more suitable for single, lump-sum investments than for small, regular investments. Investing in ETFs
ETFs in Singapore
Here are some quick facts on ETF trading in Singapore:
• As of Feb 2011, Singapore had 75 ETFs with about S $ 3.2 Billion (S $ 3,200,000,000) in assets listed on SGX, the Singapore Exchange. By comparison, the Asia-Pacific region (excluding Japan) had about 190 ETFs with about S $ 52.5 Billion in assets by end-2010, while the US alone had about 1,100 ETFs with more than US $ 1
Trillion (S $ 1,270,000,000) in assets by Feb 2011.
• SGX has:
»Country ETFs for Singapore (3 ETFs), Australia (1), Brazil (1), China (6), India (5), Japan (3), Malaysia (2) and Russia (2), amongst others;
»Region-wide ETFs, including those for the Asia-Pacific (5), emerging markets (4) and global markets (2);
»Commodity ETFs for a broad basket of commodities (5) and gold (1);
»ETFs for Fixed-Income instruments (mostly bonds) and Money-Market instruments.
• As of Jan 2011, ETFs made up just 1.5% of trading volume on the SGX, compared to 14% in Europe and 40% in the US. However, growth has been dramatic: ETF volume on the SGX in 2010 was 45% higher than the volume in 2009.
• You can currently use your CPF savings to invest in 3 ETFs:
»ABF Singapore Bond Index Fund;
»StreetTRACKS Straits Times Index Fund;
»SPDR Gold Shares Trust.
• ETFs can be transacted through your typical SGX listed stock brokers; the usual commission rate of between 0.18-0.28%, depending on amount, applies.
ETFs are best viewed as combining the risk diversification of unit trusts with the flexibility of stocks. They are a practical implementation of the philosophy of Index Investing which downplays picking individual stocks in favor of picking sectors, markets or geographical regions.
However, you should understand that, like any investment, ETF investments carry risks. Diversify even when investing in ETFs. We suggest you spread your ETF investments among an ETF on precious metals, an ETF on the STI, an income ETF, an emerging market ETF, and an ETF on developed / global economies. This diversified portfolio is well within the means of the average Singaporean investor.
Finally, the fact that ETFs are listed on changes means that both investing strategies (eg, longterm, buy-and-hold approach) and trading strategies (eg, shorter-term, more active, buy-when-low and sell- when-high approach) become possible.
Disclaimer: Traders Round Table has no interest, financial or otherwise, in any of the ETFs mentioned or in any fund management companies; names have been mentioned only to make examples easier to understand.
• ETF assets and listings in Asia Pacific ex-Japan continue to grow (Professional Adviser)
• ETF trading in Singapore to grow (Channel NewsAsia)
• Exchange Traded Funds (SGX)
• Exchange-Traded Fund (Wikipedia)