If you want to start your investment journey, you will come across different financial instruments that you can put your money on. It can be confusing since you need to place your money where the risk of loss is less.
Exchange-Traded Funds are beginner-friendly financial assets that you might consider starting with. ETFs are one of the most accessible and affordable ways to create your investment journey.
They provide extensive market exposure with much-needed diversity while investing. ETFs replicate country indexed but have also diversified into tracking regions, business sectors, assets classes, and other more complicated synthetic and leveraged ETFs.
What is an ETF?
Exchange-Traded Funds, commonly referred to as ETFs, put together funds from different investors to buy a basket of class assets that aim to track a specific market index. ETFs in Singapore seek to track indices such as the Straits Times Index (STI) i.e. STI ETF of the S&P 500 Index.
Unlike mutual funds, these ETFs are listed on financial markets such as the NASDAQ, the New York Stock Exchange, the Hong Kong Stock Exchange, and the Singapore Stock Exchange. ETFs are designed to track anything, including the price of a commodity and extensive, diverse securities collection. ETF managers create and manage the collection of assets before investors purchase them through brokerage firms.
How Does It Work?
ETFs are traded just like stocks, and their prices change throughout the day since the shares are bought and sold on the Singapore market. However, unlike mutual funds, they are only traded once a day when the market closes.
Exchange-Traded Funds hold underlying assets that are just one like in the case of stocks. Since ETFs have multiple purchases, they are ideal for diversifying their portfolios. They can have different financial products, including commodities, stocks, bonds, and a mixture of different investment types.
Most ETFs have hundreds of stocks across different industries, and some can be isolated to a particular sector or industry. ETFs are referred to as marketable security since they have a share price that can easily be bought and sold on the market exchanges through the day and can also be sold short.
What are the Common Kinds of ETF?
ETFs are custom collections of securities, so there will be different types that have emerged over time to suit the needs of investors. Here are the common types of ETFs. Please note that some may overlap.
1. Index ETFs
These ETFs are designed to track the performance of stocks indices such as the Straits Times Index (STI ETF and S&P 500). This type of ETF is ideal for investors who want a modest and stable return with low-risk, passive investments. Investing in ETFs allows investors to access the underlying assets without the restrictions that come with investing in an index-tracking mutual fund.
2. Investment Style ETFs
These are created to match an investor’s investment styles. For example, some would like to invest large-cap vs. small-cap, growth vs. value. Some risk-averse investors would like regular income payments to decide to invest in dividend income-themed ETFs that are relatively low-risk and seek out individual stocks.
3. Industry ETFs
These ETFs are a collection of stocks from a specific industry like digital media and renewable energy. Industry ETFs are an excellent idea for investors who have a keen interest in a particular sector but want to lower the risk of investing by spreading their investment across different companies from the same industry. It is much better than having to choose between many stocks at once.
4. Socially or Environmentally Conscious ETFs
There are ETFs curated to match your desires for investors who like to combine morality with their investing. Here you will invest in a company for its profits and its values. There are environmentally focused companies that aim to uplift underrepresented communities that you can decide to invest in based on that sole reason.
5. Short ETFs (Inverse ETFs or Bear ETFs)
Short ETFs are a collection of derivative contracts, in most cases futures. They are designed to allow investors to profit from securities that lose value quickly.
They allow investors to short securities in groups instead of individually. Inverse ETFs are actively managed and have higher management fees than others. They also have a higher risk than the usual ETFs due to the speculative nature of their construction.
6. Commodity ETFs
Commodity ETFs are made of derivative contracts such as futures for commodities such as corn, crude oil, or lumber. These commodities must be received if purchased, so it is an excellent way for investors who would like exposure to specific industries to gain exposure without delivering the commodity. There are commodity ETFs made up of commodity-related equities rather than derivatives contracts for the actual commodities.
7. Bond ETFs
These consist of bonds exclusively. In normal circumstances, bonds are not traded on the stock market but are instead exchanged over the counter with the help of brokers.
They allow investors to easily buy into the bond markets on the Nasdaq and the NYSE. Other bond ETFs track bonds indexes while others track treasury, corporate, convertible, municipal, or floating-rate bonds and others a combination of all these. Bond ETFs offer the least investment risk compared to commodity, stock, and mixed ETFs.
8. Cryptocurrency ETFs
Cryptocurrency ETFs first hit the market in 2021, track the price of cryptocurrencies, and are traded in centralized exchanges, same as stocks. They allow investors to diversify their portfolios by gaining exposure to the crypto market without buying or holding a cryptocurrency wallet. Crypto ETFs are riskier than other ETFs on this list since they are notoriously volatile.
9. Actively Managed ETFs
Most ETFs on this list are passively managed, meaning their track something like an index or a set of stocks. Most of the assets they track do not change much over time.
Actively managed ETFs, however, involve a group or a person conducting research and making strategic decisions about the composition of the fund regularly. They, however, come at a higher expense ratio because of their management efforts.
What are the Pros and Cons of ETFs?
- Access to stocks in different industries
- Fewer broker commissions hence low expense ratios
- Risk management through diversification
- Some ETFs only target specific industries
- Single industry-focused ETFs limit diversification
- Actively managed ETFs have a higher expense ratio
- Lack of liquidity can hinder transactions.
Should You Buy an ETF?
Simple answer? Yes.
Here are some crucial things to consider when it comes to investing in ETFs:
ETFs are traded every day on the open market, which means that they are very liquid since you can choose to buy or sell the ETFs at any time. You only need a brokerage to purchase an ETF and a Central Depository (CDP) account.
ETFs are an excellent way to start your investment journey if you are not confident with your investing prowess. Depending on the type of industry you want to invest in, they will give you exposure to different bonds, stocks, and other financial instruments.
Low Entry Barrier
You can invest in top companies at a fraction of the price with no minimum investment. It is not expensive to start investing in ETFs as it can be when purchasing individual stocks.
A Wide Range of ETFs is Available
There are thousands of ETFs available in the market that you can choose from different industries, geographies, other asset classes, stocks exchanges, and countries. You get to choose whichever you want based on your preferences and investment goals.
How to select the right ETF to buy?
There are many ETFs to choose from when you start investing. You should select those that match your investment goals and from industries that you are interested in. Here are some of the factors that you should always consider when picking the right ETF:
Level of Assets
To consider an ETF a viable investment choice, it should have the ideal number of assets, and a standard threshold is $10 million. If an ETF has a threshold below that, it will attract investors’ limited level of interest. As with stocks, if they have a limited interest from investors, it leads to wide spreads and poor liquidity.
Daily Trading Activity
Before investing in an ETF, you must check whether it trades a sufficient volume daily. Popular ETFs trade in millions every day, while some ETFs barely make any trades. A high trading volume is an excellent liquidity indicator regardless of the asset class in question. So, a higher trading volume means more liquidity and the wider the bid-ask spread.
Underlying Asset or Index
You must consider the class asses in question on the underlying index in which the ETF is based. It is best to have an ETF that is pretty diversified with a broad-based and is widely followed that an obscure index with a narrow geographic or industry focus.
The First ETF in an industry usually gets the largest market share before others jump on the same bandwagon. It is essential to avoid ETFs that imitate other original ideas because they might not differentiate themselves from their competitors hence fail to attract new investors.
Most ETFs are designed to track specific industries closely, but some do not do that good of a job. Go for an ETF with minimal tracking error than this with a greater degree of error.
The expense ratio refers to how much the investment funds under management are used for operating and administrative expenses. It is derived from the ratio between the Assets Under Management (AUM). This is the fee you pay to have the ETF managed.
When you know the expense ratio, you will learn how much your investment will be used to pay the fees. Actively managed funds or ETFs accrue a higher expense ratio, while passive ETFs have a lower fee of less than 0.5%
10 Best ETFs to Buy in Singapore
|ETF in Singapore||Stock Code||What it tracks||Expense Ratio||Past 5 year returns||Dividend Yield|
|1||SPDR STI ETF||ES3||Top 30 companies listed on SGX, by market cap||0.30%||27.69%||2.49%|
|2||Nikko AM Singapore STI ETF||G3B||Top 30 companies listed on SGX, by market cap||0.30%||27.09%||1.50%|
|3||Xtrackers MSCI Singapore UCI||O9A||Top big and mid-cap companies listed on SGX||0.50%||28.88%||nil|
|4||ABF Singapore Bond Index Fund||A35||Singapore Government Bonds||0.24%||13.74%||2.20%|
|5||SPDR S&P 500 ETF||S27||Top 500 companies listed in the US, by market cap||0.09%||116.90%||1.30%|
|6||Lion Phillip S-REIT ETF||CLR||High dividend Singapore REITs||0.60%||no data||4.78%|
|7||Nikko AM-StraitsTrading Asia ex Japan REIT ETF||CFA||High dividend Asia REITs, excluding Japan||0.60%||no data||0.28%|
|8||Phillip Sing Income ETF||OVQ||Top 30 dividend singapore stocks||0.75%||no data||2.89%|
|9||SPDR Gold Shares ETF||O87||Gold Bullion Price (in USD)||0.40%||43.64%||nil|
|10||Nikko AM SGD Investment Grade Corporate Bond ETF||MBH||non-government investment-grade bonds (SGD)||0.25%||no data||2.77%|
How to Buy ETF in Singapore?
Now that you have an idea about ETF investing, you might be wondering how you can buy them. There are three ways of accessing ETFs in Singapore. Here is a look at them:
Through A Brokerage Account
Buying ETFs is almost the same as purchasing other financial instruments on the Singapore stock exchange, such as stocks and futures. You will first need to purchase a CDP account and a brokerage’s account. Once you open a brokerage account, you can then purchase the ETFs of your choice at a comfortable price.
Start A Regular Savings Plan
A regular savings plan (RSP) allows you to invest a predetermined amount every month. You even can start with a minimum deposit of $50. A standard savings plan will enable investors to make regular investments and make it possible for new investors to get started.
POSB/DSB Invest Saver are regular savings plans that allow you to invest in ETFs such as ABF Singapore Bond Index Fund, Nikko AM STI ETF, the Japan REIT ETF, and the SPDR STI ETF. Other providers such as FSMOne and dollarDEX will enable you to begin investing in the ETF of your choice. It is important to note that Nikko AM STI ETF invests in 30 of Singapore’s stocks by market capitalization.
Through A Robo Advisor
Robo advisors offer investors investment portfolios designed to match their investment goals, risk appetite, and preferences. The portfolios automatically rebalance, and you have the option to add to your portfolio every month.
Robo advisors such as Autowealth and Stashaway have curated ETF portfolios that you can choose from. They allow you to own a curated ETF portfolio with different ETFs through a single investment.
Please keep in mind that not all Robo-advisors offer the option of investing in ETFs. Be sure to ask your Robo advisor before signing up.
How Is an ETF Different from Index Funds?
The index fund is another name for mutual funds that track an index. An index ETF is curated in the same way and holds the stocks of an index it tracks. However, an ETF is more cost-efficient and liquid than an index mutual fund. You can also buy an ETF from the stock market directly throughout the day, while you can only buy a mutual fund through a broker at the close of each trading day.
What Is an ETF Account?
You do not need to have an ETF account to purchase ETFs. ETF investing is easy with the typical brokerage account, and you can use it to trade throughout the day.
What Does an ETF Cost?
ETFs have overhead and administrative costs, which the retail investors typically cover. These costs are referred to as the expense ratio and represent a meager percentage of investment.
The more the ETF industry grows, the lower the costs, making ETFs the most affordable investment tools. The expense ratio can differ significantly depending on the nature of the ETF you choose and your investment model.
How Many ETFs Are There?
The number of ETFs has dramatically increased over the past decade. By 2020, it was estimated that there would be an average of 7,602 ETFs across the stock exchanges globally. The number keeps increasing over time, and it is predicted that more will come.
What is the Difference Between ETFs and Mutual Funds?
Both mutual funds and ETFs are curated from a basket of securities. They both allow investors to diversify their investment portfolios by buying into many securities with a single investment. However, ETFs can be freely traded on the stock market openly, while mutual funds can only be traded after the close of the markets.
ETFs can be traded the same way as stock because their prices keep fluctuating. This means that investors can put a margin, limit, or stop orders depending on their investment strategy. Mutual funds, on the other hand, only allow investors to place their money into a fund or take it out.
ETFs can be traded on centralized stock markets similar to stocks. They track the performance of a sector, index, and other assets. They are one of the most accessible and affordable ways to start your investment journey if you are a newbie.
- ETFs are baskets of securities that are traded on the Singapore exchange, just like stocks.
- ETFs have a lower expense ratio and few broker commissions when compared to other class assets.
- ETFs help you diversify your investment portfolio.
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