An Introduction To ETFs - What You Should Really Know
A definition of Exchange Traded Funds
An Exchange Traded Fund, commonly abbreviated as ETD is a type of open-ended investment fund. These funds are traded on the stock market. When you invest in one of these funds, your money is put together with the contributions of other investors and is then invested in function of what the ETF's objective is.
The purpose of most ETFs is to track or replicate the ups and downs of a specific index. A lot of ETFs are supposed to track commodity indexes. The purpose of these ETFs is not to outperform the index but rather to replicate its movements. These funds are passively managed by professionals. These funds usually have lower fees since there is no need for active management.
Different structures exist for ETFs. You can for instance find cash-based ETFs or synthetic ETFs, which use derivatives.
You will also come across investment products that belong to the SIP category. SIP stands for Specified Investment Products. If you are considering investing in an ETF or another product, check with your financial institution if this product is considered as an SIP. Check the consumer guide on SIP to learn more about he requirements that exist regarding SIP transactions.
What kind of return can you expect?
Investors can gain exposure to an ETF by purchasing units in the fun. You can earn a profit if the price of the units you purchased increases. In some cases, ETFs pay dividends to investors.
Why are ETFs interesting investments?
These funds are interesting because there are ETFs that track many different indexes. This is an easy way to gain exposure to an index. You can for instance invest in a fund that is designed to track the STI or Straits Times Index and easily gain exposure to the Singapore market.
These funds are an affordable way to gain exposure to an index since there is no need to purchase all the stocks that constitute an index. Compared to actively managed ETFs, the funds that are designed to track an index usually have affordable fees. Most ETFs do not have sales charge but you might have to pay brokerage commissions or transfer taxes if you decide to buy or sells ETF units on the SGX.
Should everyone invest in ETFs?
These funds are a very interesting investment product but ETFs may not be a good option for you depending on your goals. ETFs would not be a good choice if:
- You want high returns but do not want to invest in risky products that could result in you losing all or an important portion of your original investment.
- You do not have a good understanding of the events that could cause the value of an ETF to go up or down.
- You do not have a good understanding of the risks you take by investing in an ETF. It is important to be aware of the risks you take, especially if you invest in an ETF that uses derivatives since the provider or the counterparty of the derivative can default.
- You do not want to invest money over a long time frame. It is usually best to invest on the long-term to avoid short-term price fluctuations. Some ETFs can be interesting for short-term investments depending on what your goals are.
- You do not know enough about the track record of a fund or about its manager.
How much money can you lose?
There is no principal guarantee with ETFs. This means you can lose everything you invest, or lose a significant amount if the ETF loses its value. Check the prospectus and the product highlights sheet to learn more about the risks associated with investing in ETFs.
Are you looking to invest in Asia? Singapore is the financial hub in Asia. You may like to check out the Straits Times Index ETF: STI ETF Comprehensive Guide.