In the investment game, diversification is marked important by all the people who have had a loss in their investment ventures. To diversify your portfolio means making sure that your money doesn’t get lost in one place. It is necessary if you want to see some gain from another stock while one of your stocks have come down to a base level in the market. This diversification plan has led to the growth of popularity of exchange-traded funds or ETFs. ETFs are funds traded in the same way as stocks on the exchange but the difference is that ETFs have several assets under them, unlike stocks.
ETFs are collective securities that are used to track the underlying assets they represent. When you buy an ETF you get different investment assets in one index like stocks, commodities, and bonds. ETFs are marketable securities that can be traded like stocks but are easier to buy and sell than the common stocks and shares. An ETFs value changes multiple times during the trading period as the ETF is bought and sold on the market. ETFs like ABF Singapore Bond Index Fund and SPDR Gold shares ETFs are popular among retail investors in Singapore. ETFs can be beneficial for people who are turning to investment for the first time.
Types of ETFs
There are different types of ETFs in the market that hold different values on market factors like movement and trading. These ETFs can be used separately by the investor for wealth generation, market speculation or to partly reduce some risk in their portfolio.
Bond ETFs– These bonds include government bonds, state bonds, local municipal bonds or corporate bonds as assets.
Industry ETFs– These ETFs are used to track the movement of a single industry at a time. For example, technology, banking, and the oil and gas sector.
Commodity ETFs– These ETFs are for trade-in commodities such as crude oil or gold.
Currency ETFs– This ETF is for investment in foreign currencies
Inverse ETFs– These ETFs try to earn profit by the decline of shares and stocks. The practice includes selling stocks with the expectation of a decline and then buying them back at a lower price.
Buying and Selling ETFs
In Singapore investing in the ETFs means to be on the lookout for the ETFs that are tracking the Strait Times Index (STI) on the SGX. For first-timers, it can be a huge exposure to better stocks and high dividend gains. There are two ways to buy an ETF in Singapore
Lump-Sum Investment through brokerage can be a viable option for people who can readily invest a fixed amount of money all at once. You’ll have to open up a brokerage account and with it, a CDP account. Once your account has been set up, you can decide how much you want to buy. Suppose, 1 lot on the STI ETF is SGD3.57, so a hundred shares in the one lot will cost you SGD357. You’ll also have to pay the brokerage costs and commissions.
Another way of investing in ETFs is through Dollar Cost Averaging in which you buy your shares with a regular savings plan that allows you to contribute a fixed amount every month for buying a fixed amount of shares. This won’t be an actual savings account with principle benefits. But you can opt for it if you are unable to contribute to the whole amount of money as a lump sum. For this option, you don’t need to have a CDP account. You can simply deposit money in your bank account and fix an amount that you can use to buy ETFs every month.
Benefits of Investment in ETFs
For newcomers, ETF investment has benefits that they won’t find in stocks or mutual funds.
Exposure to Blue-Chip Stocks
Investing in an ETF means you get to track the index on the stocks. So when you invest in a national index such as the STI, you invest in the national economy. Since Singapore is predicted to grow over time, you can invest in long term plans that lower the risks.
When investing in ETFs, you get to have reached to the blue-chip stocks of the economy. ETFs allow you to buy stocks of big companies in one go without having to put in extra money that you do when you buy them individually. This happens because of the property of ETFs to hold multiple assets in one index.
Since newcomers tend to have lesser knowledge about the prediction of stocks on the market, they have a hard time deciding which stocks to buy and may as well end up buying stocks that increase their risk factors. ETFs, help new investors in buying several stocks and tracking their movement through the market. So the investors can have knowledge about the various company stocks while decreasing their risk factor by investing in different companies at the same time.
Easy Buying and Selling of ETFs
Since ETFs of STI are listed on the stock exchange, it is easier for investors to trade the funds according to the movement of the market. The ETFs are easily accessible as long as it is a trading day. STI ETFs are seen as a long term investment but the constant fluctuation in the market gives them the benefit of being easily bought and sold in the nick of time. Investors can read the fluctuations in the market and benefit from them in a span of a few days. For example, if an index is on the downward trend it is an opportunity to buy more indexes. And if the index goes up in a matter of days, can just sell out your indexes for profit.
Cost Efficiency
Since the purpose of an ETF is to replicate the movement of the index, the management fees for ETFs are cheaper as compared to actively managed funds, where the main purpose is to generate profit from the investment. Sales charges are not incurred on the STI ETFs because the managers are not obliged by law to protect your investment or care for loses. Although brokerages and commissions stay the same as other funds, ETFs are cost efficient provided the low risk and quick trading.
People starting their investment journey can benefit from investment in ETFs. It helps you gain risk-free experiences in the market and gives you a good head start for investment in other types of assets and stocks.
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