If you're looking to build a portfolio of investments for yourself, most financial institutions would tell you to keep it diversified and not to "put all your eggs in one basket", as the saying goes. Exchange-traded funds (ETFs) could be a great way to do that. But how do you know which one is suitable for you?
There are many different types of ETFs in Singapore, and each one is classified depending on the types of securities or derivatives the fund buys into and how it tracks the value of what it has purchased. To get you started, here are some basic things that you need to know.
What Is an ETF?
Just like mutual funds and other forms of collective investment, an ETF is a pool of money that investors contribute to, to make a bet on the behavior of a security such as a stock or commodity as it is tracked on an Index.
As its name suggests, ETFs themselves are traded on an exchange in much the same way that stocks, currencies, or commodities are traded. If the value of an ETF rises relative to the price at which the fund was purchased, the investors in the ETF see a profit. Some ETFs also release dividends and behave as if the investors were shareholders in a company.
Types of ETF
Some ETF types are classified based on what the fund elects to buy into. In Singapore, there are four of these:
Equity ETFThese ETFs react to the behavior of commonly traded stock market indices. Singapore's most popularly tracked stock index is the Straits Times Index (STI), so the most commonly traded ETF here is called the SPDR STI ETF. The STI itself tracks the movement of 30 of the country's biggest and most liquid companies, so anyone buying into this ETF would do well to take stock of their behavior as well. The other equity ETF traded in Singapore is called the Nikko AM STI ETF, which aims to mimic the fundamentals of the STI.
Real Estate Investment Trust (REIT) ETFTo better understand what this type of ETF is, we must first discuss what an REIT is. Real estate investors often buy into income-generating properties with the objective of seeing a regular return on these. When investors pool their money, this pool is typically called a REIT, the behavior of which is tracked on several indices. In Singapore, the market trades three REIT ETFs, namely:
● Phillip SGX APAC Dividend Leaders REIT ETF
● NikkoAM-StraitsTrading Asia Ex Japan REIT ETF
● Lion-Phillip S-REIT ETF
Of these, the Lion-Phillip is the newest and youngest on the market.
Commodity ETFThese are simply ETFs that are traded based on the behavior of the commodities market indices. In other countries, there are commodities ETFs that track widely traded goods like oil, cotton, or even water, but in Singapore, only one commodity ETF exists, and it tracks gold. It is called the SPDR Gold Shares.
Bond ETFAlso known as fixed income ETFs, these track indices in the bond market, which is known for its relative stability. Consequently, investors looking to reduce their portfolio volatility would do well to invest in this type of ETF. In Singapore, only one of these is available, and it is known as the ABF SG Bond ETF, which started being traded in 2005.
Other countries offer additional types of ETF relative to other indices, such as the foreign exchange currency index, but those are not available in Singapore at the moment.
ETF Types by Purchase
ETFs can also be categorised by whether the object of the fund is purchased directly in the objective of the index or in its derivative.
Cash ETFIf the ETF buys directly into the index, it is referred to as a cash ETF. These funds may be used to buy into either the entirety of an index's components, or just a portion of them.
Synthetic ETFIn this case, investors do not directly own any of the assets in an index, but they do own a derivative-based product that seeks to replicate the index and its behavior.
Important Considerations Before Investing
Appetite for RiskETFs are not principal-guaranteed. You could lose all of your initial investment into the fund, depending on the behavior of the benchmark you selected. In this case, it would be advisable to stick to the age-old investment maxim, "Don't invest what you can't afford to lose."
Long-Term VS Short-TermWhile there are a few ETFs that are appropriate for short-term investment, most of them have a longer horizon to offset any short-run volatility.
Relationship with Fund ManagerHow well do you know the ETF manager, and how comfortable are you with leaving your money with them for an extended period of time? Do your due diligence before selecting the fund manager to engage with. Make sure their reputation is solid and that they have no record of corruption before choosing to invest with them.
While ETFs are by no means a surefire investment, they are a good way to get started. Learning the intricacies of the various market benchmarks could lead to greater familiarity with market behavior and a stronger investor position in the long run.
