With a variety of securities available for you to choose from, it can be challenging to choose one to begin with.
If you’re new to investing and wish to look into beginner-friendly financial instruments, Exchange Traded Funds (ETFs) might be the choice for you.
Here’s our guide to investing in ETFs in Singapore.
What is an ETF, and how does it work?
An exchange-traded fund — most commonly known only as “ETF” — is a fund that pools money from various investors to purchase a basket of assets that aims to track a selected market index.
This collection of assets is created and passively managed by fund managers before being purchased by the general public through brokerages.
Since ETFs are available to the public, you can purchase them in different ways like margins, short sales, or even keep them for a longer-term by holding them.
Investing in ETFs allows you to diversify your investments to manage risks. It also provides you with comfort as you don’t have to worry about individually picking company stocks.
The market index it follows can be a stock, bond, commodity, or a mixture of these assets. However, there is usually an asset that forms the bulk of the ETF composition.
It also works just like a stock as it allows you to buy and sell in the stock market.
Specified Investment Products (SIP) ETFs
Many exchange-traded funds have been classified as Specified Investment Products (SIPs). This is because the structures of ETFs can be pretty complicated.
This means that there are additional exposures that you will face that will affect your investments.
Because of this, SIPs are regarded as higher risk but might provide you with higher potential returns than regular ETF investments.
However, to invest in them, you will have to meet specific needs – such as passing the CKA and CAR.
What is the difference between ETFs and Unit Trusts / Mutual Funds?
ETFs and unit trusts / mutual funds‘ main difference is that ETFs are passively managed while unit trusts are actively managed.
Because of this, ETF fees are generally much lower than mutual funds.
As mentioned, ETFs aim to replicate the performances of market indexes. Unit trusts generally try to beat the index performance.
ETFs can also be bought and sold the whole day, while mutual funds trade only once per day.
What are the different types of ETFs?
Exchange-traded funds are available for almost every purpose. Firstly, you’ll need to understand the difference between a traditional ETF compared to a leveraged ETF.
Traditional ETFs
Traditional ETFs are ETFs that purchase a basket of assets that aims to track a selected market index. Basically, what you’ve been reading from the start of this article so far.
Leveraged ETFs
These funds utilise debt to “gear up” their portfolios, magnifying returns. But this carries increased risk as well.
For example, a leveraged S&P 500 ETF may aim to double the index returns along with lesser interest and expenditures. But on the flip side, these funds can also double their losses.
Next, you’ll need to understand the first layer that distinguishes ETFs for long-term investment and ETFs for trading purposes.
Inverse ETFs
These funds take “short positions” on the underlying index. The prices of shares move in the reverse direction of the market indices.
You can think of these funds as bets that contradict the market: if the index loses money, this ETF earns from it.
Similarly, if the index gains, these ETFs are the inverse and lose money.
Short-selling ETFs have more risks, and this happens because of no limitations towards your losses.
Long ETFs
The opposite of inverse ETFs and the most commonly referred to ETF in Singapore. These types of funds require a long position on a primary index of a stock market. They usually own company shares in a specified index in the same proportions as the index.
A rise in the index leads to an increase in the prices of shares in long ETFs. This rise is almost equal in amount deducting any expense or trade costs.
Next, you’ll need to understand the industries and regions that the ETFs you’re thinking of purchasing are tracking.
Industry ETFs
Industry ETFs possess a collection of stocks that represent a sector. Examples include energy, oil, technology, mining, transportation, healthcare, technology, etc.
Region ETFs
These investment funds purchase shares in companies that characterise several industries in a particular country, different regions in a country, or a country as a whole.
They can hold shares from the best performing publicly traded stocks in a specific country as calculated by market capitalisation. You can even also obtain regional ETFs that focus on whole continents.
Lastly, you will need to understand the type of ETFs based on what asset types they invest in. Below are the most commonly talked about ETFs in Singapore.
Commodity ETFs
Commodity ETFs capitalise on specific products such as commodities, valuable metals, or a blend of several commodities. For example, a fund that puts investment in gold may hold stocks of gold or entitle actual gold bullions held in trust by an upholder.
Currency ETFs
These securities aim to grab hold of a return through fluctuation or growth of a foreign currency.
REITs ETFs
REIT ETFs track the Real Estate Investment Trust (REIT). REITs are a collection of investments investing in a portfolio of real estate assets. REITs might pay you a dividend if it performs well.
Bond ETFs
Similar to REITs ETFs, bond ETFs track a selection of bonds rather than real estate. With bond ETFs, you can expect regular dividends as well.
Equity ETFs
As the name implies, equity ETFs track a portfolio of stocks from various companies.
What fees and charges are involved in ETFs?
Apart from transaction charges by your brokers, there are often no charges for investing in ETFs. Brokers charge between 0-1% fees or a fixed amount, whichever is higher.
Fees wise, there are fees payable for all ETFs. This includes fees charged by fund managers, trustees, and other parties and is usually below 1%.
Though these fees are technically paid by the ETF (net of your returns) and not by investors, they may affect your returns.
Advantages of ETFs
ETFs are almost always a modern choice for many investors. Here’s a list of reasons why.
Low Fees
Because ETFs are passively managed, the management fees are much lower than unit trusts. One of the biggest reasons for its popularity amongst Singaporean investors.
Diversification
Another huge reason for its attractiveness is that ETFs are diversified. You buy into a portfolio of assets that manages the risk you take. If you’re buying individual stocks, a change in market conditions can easily affect your entire portfolio.
With ETFs, these risks are mitigated through gains from returns from other companies. You can also gain exposure to an index without having to invest in all its component stocks.
Ease of Trade
Like the point above, ETFs allow you to buy into various stocks just by buying into the fund. With a click of a few buttons, you “own” stocks of different companies.
Buying and selling ETFs can also be easily and quickly done using your brokerage account during its trading days. This is unlike other funds where you can buy shares only once a day.
Also, unlike unit trusts, ETFs do not suffer the complication of unit redemptions.
Tax Efficient
Exchange-traded funds are more tax-efficient and acceptable for holding in taxable accounts.
Disadvantages and Risks of ETFs
Foreign Exchange Risks
As with all foreign investments, you have risks from foreign exchange if you purchase an ETF whose base currency is not the same as yours.
Complications
The traded price of an ETF may not exactly be the same as its NAV (Net Asset Value), as this price is subject to various market demand and supply. Furthermore, changes in the NAV of an ETF may not truly match the index’s price changes.
Non-Capital Guaranteed
Similar to all investments, your capital is not guaranteed.
Risk of market performance
As with all investments, you become vulnerable to risks in the market or certain benchmark volatility tracked. This means that any unfavourable fluctuations might wipe your entire capital.
Passively Managed
The cons of a passively managed fund mean that you can expect returns that are generally lower than a well-managed unit trust.
This is not exactly a bad thing if you’re looking for something “safer”, but a point to consider for those looking for more aggressive returns.
What are your objectives and risk profile?
Every ETF has a unique risk profile of its own. Thus, while going through the various options available, it is vital to check whether your objectives and risk appetite match the ETF.
It’s best to list your goals and needs, investment objectives, conditions, and risk tolerance. From there, you can determine your investment strategy before personalising your own investment portfolio. And also, make sure that you’re comfortable with the ETF manager.
Once you consider all these, you’ll be able to choose ETFs that suits your needs.
What to look out for when choosing an ETF?
Different types of ETFs are available. Thus, it is essential to consider various factors.
Market Capitalisation
A good ETF should always have a valuable number of assets. The most commonly looked at ETFs have a market capitalisation of at least 10 million dollars.
If the value is below this amount, it may mean that the ETF might only have a limited number of investor interests.
Tracking Errors
Always opt for an ETF that has the least tracking errors, as this identifies how accurate it is to replicate the index it is tracking. This is also crucial to gain stable returns.
The Main ETF
It is also good to opt for ETFs with the ‘Lion’s Share of Assets’ because there may be many smaller ETFs that are simply mimicked alternatives.
Index It’s Tracking
As ETFs track a market index, the underlying index should also be considered so as to not to get stuck with an ETF with a slim industry or geographic focus. This ensures that your investments have room for growth.
Trading Volume
It would be best if you also considered trading volume because it is an essential gauge of liquidity, irrespective of the asset class. The higher the trading volume, the higher its liquidity can be.
Best ETFs in Singapore
Here are some of the best ETFs in Singapore that you can have a look at:
- SPDR STI ETF (SGX: ES3)
- Nikko AM STI ETF (SGX: G3B)
- ABF Singapore Bond Index Fund (SGX: A35)
- Phillip Sing Income ETF (SGX: OVQ)
- Lion Phillip S-REIT ETF (SGX: CLR)
- SPDR S&P 500 ETF (SGX: S27)
- SPDR Gold Shares ETF (SGX: O87)
- NikkoAM-StraitsTrading Asia ex Japan REIT ETF
- Ishares Barclays USD Asia HY Bond ETF
We also have a list of the best ETFs in Singapore that you can read here.
Also Read:
- Best China ETFs
- Best US ETFs
- Best Gold ETFs
- Best Dividend ETFs
- Best REIT ETFs
- Best Tech ETFs
- Best Small-Cap ETFs
- Best Electric Vehicles (EV) ETFs
- Best World ETFs
- Best Halal ETFs
- SPDR STI ETF (ES3) vs NikkoAM STI ETF (G3B)
Conclusion
Exchange-Traded Funds are a popular way to get into stock investments whether you’re a seasoned investor or starting for the first time.
Due to the ease of handling, low-cost fees, diversification, and liquidity, ETFs are perfect for newer investors looking to step foot into the world of investments.
Furthermore, you can choose to invest in one or multiple ETFs and manage it with ease and lower costs.
Even if you may not be an expert in stock exchange markets and investing, exchange-traded funds are a great way to start investing in stocks as your risks are managed through diversification.
For many investors in Singapore, ETFs bring out profit, versatility, and ease with an expense that is relatively lower than other funds in the same market.
If you are searching to invest in ETFs in Singapore, there are many viable options available in the market.
To start investing in an ETF, you need to have a suitable brokerage account. This account will allow you to sell and purchase ETFs that are listed in public.
We have a guide on how to buy ETFs in Singapore here.
Alternatively, can invest through a regular savings plan.
If you’re interested in checking out ETFs in Singapore, you can rely on the ETF screener that SGX (Singapore Stock Exchange) provides. This screener offers multiple features to filter out ETFs based on what you’re looking for.
However, as with all investments, you should always do your research. It is also beneficial to talk to a financial advisor for investment advice to determine the best investment strategy for yourself.
