Investing in exchange-traded funds (ETFs) has become increasingly popular in recent years as investors look for ways to diversify their portfolios and access various asset classes.
Singapore is no different, with a growing number of ETFs available on the Singapore Exchange (SGX). However, there are still many misconceptions about ETFs and how they work.
In this article, we will look at what ETFs are, how they trade on the SGX and some of the benefits and risks associated with investing in them.
What are ETFs?
An ETF is an investment fund that tracks a basket of assets, such as stocks, bonds, or commodities. ETFs are traded on exchanges, and their prices fluctuate throughout the day like other stocks.
One of the main benefits of ETFs is that they offer investors exposure to a wide range of asset classes in a single investment. For example, the SPDR STI ETF (SGX: ^ES3) tracks the Straits Times Index (STI), composed of thirty of the biggest companies listed on the SGX. Investors who buy shares in the SPDR STI ETF will get exposure to all 30 companies in a single investment.
Another benefit of ETFs is that they tend to be more cost-efficient than actively-managed funds. ETFs are passive investments that track an underlying index, and as such, they do not require a team of managers to pick and choose which stocks to buy and sell.
It leads to lower management fees for ETFs, as low as 0.3% per year. In comparison, actively-managed funds typically charge 1-2% per year in management fees.
How do ETFs trade on the SGX?
ETFs listed on the SGX can be bought and sold through your usual stockbroker, like Saxo Bank Group. You will need to have a brokerage account set up before starting trading ETFs.
If you are new to investing, you may consider using an online broker that offers a user-friendly platform and competitive fees. For example, Tiger Brokers offers commission-free ETF trading with a flat rate of S$10 per trade.
Another popular online broker, FSM One, offers free ETF trading for the first S$20,000 worth of trades. After that, each subsequent trade will cost S$25. Once you have selected a broker and set up an account, you can start buying and selling ETFs just like any other stock.
Benefits and risks of investing in ETFs
Investing in ETFs comes with many benefits, as we have seen. It’s vital to be aware of the risks involved before investing.
One of the main risks associated with ETFs is market risk. It’s the risk that the value of your investment will go down when the overall market falls. For example, if the STI index falls by 10%, the value of your SPDR STI ETF shares will also fall by 10%.
Another risk to be aware of is tracking error risk. It’s the risk that the ETF will not precisely match the performance of its underlying index. It can happen for plenty of reasons, such as differences in how the index is calculated or changes in its composition.
Finally, it’s also important to remember that ETFs are subject to fees and expenses. As we mentioned earlier, management fees for ETFs are typically lower than those of actively-managed funds. You will still need to pay fees, such as brokerage commissions, when buying and selling ETFs.
Investors should always be aware of the risks associated with the underlying assets that make up the ETF. For example, if you are investing in an ETF that tracks a basket of stocks, you will be exposed to the same risks as if you were investing in those stocks individually. It includes company-specific risk (the risk that a particular company will perform poorly) and sector risk (the risk that a particular sector will underperform in the market).