Investing in ETFs can be one of the easiest ways to grow your wealth, but if you’re new to it, you might be wondering where to start.
Don’t worry – I’ve been there too!
In this post, you’ll learn:
- What exactly is an ETF
- The different types of ETFs available in Singapore
- How to choose the right ETFs for your portfolio
- How to get started and what tools you’ll need
Whether you’re a beginner or just need a refresher, stick around to learn how to create your ETF portfolio and avoid the common pitfalls many investors face.
Let’s dive in!
What is an ETF?
An exchange-traded fund (ETF) is essentially a type of investment fund that bundles together a collection of assets like stocks, bonds, commodities, or even currencies.
ETFs are designed to track the performance of a specific index or sector.
Think of it like this: instead of investing in just one company, with an ETF, you’re spreading your money across multiple companies or assets within a specific market or sector.
Why choose to invest through ETFs?
Diversification
One of the biggest perks of investing in ETFs is the immediate diversification they provide.
With an ETF, you get exposure to a broad range of companies or assets with just one investment.
It’s like buying a pre-packaged basket of shares, bonds, or commodities all in one go.
This diversification helps you manage risk.
Instead of relying on the performance of just one or 2 stocks, your investment is spread across many.
So, if one company in the ETF underperforms, the impact on your overall investment is softened because other companies might be performing better.
Affordable
Unlike unit trusts, which can come with high management fees due to active management, ETFs are typically passively managed.
This means the fund simply tracks an index or sector with minimal management needed, resulting in lower management fees and expenses.
For instance, the SPDR S&P 500 ETF, one of the most popular ETFs globally, has an expense ratio of just 0.09% per annum.
In comparison, unit trusts can charge fees of 1% to 2% or more.
High liquidity
With ETFs, you can trade them just like stocks on an exchange throughout the trading day.
This means that whenever you feel the need to adjust your portfolio – whether it’s to take advantage of market movements or lock in profit – you can do so without any hassle.
Because ETFs are traded on stock exchanges like the Singapore Exchange (SGX), there are typically plenty of buyers and sellers available.
Low barrier to entry
For many investors, especially those just starting, the idea of needing a large lump sum to begin investing can be a bit daunting.
Thankfully, ETFs have a low barrier to entry, making them accessible to nearly everyone, regardless of their budget.
You don’t need a huge amount of capital to get started with ETFs.
In fact, some brokerage platforms in Singapore, such as Webull or Syfe, allow you to start with a small initial investment – sometimes as low as $1 through fractional trading.
This low entry point is particularly beneficial for beginners or those who prefer to invest in smaller increments over time rather than committing a large sum upfront.
Over time, this strategy can help you smooth out the effects of market volatility and potentially lower your average purchase cost.
A wide variety of ETFs are available
Whether you’re looking to diversify globally, focus on a specific sector, or invest according to your ethical values, there’s likely an ETF that matches your interests.
From local stocks to global markets, from safe bonds to high-growth sectors, ETFs offer a wide range of choices, making them an incredibly versatile investment vehicle.
Different types of ETFs available
Equity ETFs
Equity ETFs are perhaps the most well-known type of ETF, designed to track the performance of a stock index.
When you invest in an equity ETF, you’re essentially buying a basket of stocks in one go, which provides instant diversification across a particular market or sector.
Bond ETFs
These ETFs invest in fixed-income securities such as government or corporate bonds, offering a more conservative investment option than equities.
They are designed to provide steady income in the form of interest payments while maintaining capital preservation, which makes them a go-to for risk-averse investors or those nearing retirement.
Commodity ETFs
Commodity ETFs are designed to track the price of a particular commodity or a basket of commodities, giving you direct exposure to the performance of physical assets without having to own or store them.
Popular commodities include gold, oil, and agricultural products like wheat or corn.
These ETFs are particularly attractive during periods of economic uncertainty, as commodities like gold are often considered “safe havens”.
Currency ETFs
If you want to hedge against currency fluctuations or speculate on currency movements, currency ETFs offer a way to invest in foreign currencies without physically exchanging money.
These ETFs track the performance of a single currency or a basket of currencies, and they are often used by investors to manage currency risk in their portfolios or to take advantage of anticipated changes in exchange rates.
REITs ETF
Real Estate Investment Trust (REIT) ETFs offer a way to invest in the real estate market without having to buy, manage, or sell physical properties.
These ETFs invest in a diversified portfolio of REITs, which are companies that own, manage, or finance income-generating real estate.
REITs are required to distribute most of their income as dividends, which makes REIT ETFs an attractive option for investors seeking regular income.
With REIT ETFs, you can benefit from the stability and income potential of real estate without the high upfront cost or hassle of buying property directly.
Geography-specific ETFs
If you want to invest in a specific region or country, geography-specific ETFs offer you a focused way to gain exposure to the economic growth and market trends of particular areas.
These ETFs track indices or sectors within a defined geographic boundary, whether it’s a country, region, or even an emerging market.
Sector-specific ETFs
For investors who have a particular interest in specific industries or sectors, sector-specific ETFs offer an efficient way to gain concentrated exposure.
These ETFs focus on a particular sector such as technology, healthcare, or real estate, allowing you to invest in the leading companies within that industry without needing to pick individual stocks.
However, it’s important to note that sector-specific ETFs can be more volatile than broader market ETFs, as they are tied to the performance of a single industry.
Traditional cash-based ETFs
Traditional cash-based ETFs are the most common and straightforward type of ETF.
These funds invest directly in the underlying assets, such as stocks, bonds, or commodities, and aim to track the performance of a specific index or asset class.
They simply aim to replicate the performance of their underlying assets without using leverage or derivatives.
Leveraged ETFs
These ETFs aim to amplify the returns of an underlying index or asset class by using financial derivatives such as futures contracts or swaps.
The goal is to provide a return that is a multiple of the performance of the index they track, usually by 2 or 3 times.
While they can be profitable during strong upward trends, they can quickly erode your capital during downturns.
However, there are disadvantages to ETFs, too
Tracking error
This occurs when the performance of the ETF doesn’t perfectly match the performance of the index or asset it’s supposed to track.
In an ideal world, an ETF that tracks, for example, the Straits Times Index (STI) would deliver the exact same returns as the STI itself.
However, in reality, slight discrepancies can occur.
Several factors can contribute to tracking error, including management fees, trading costs, and cash drag (when the ETF holds uninvested cash).
Even though these differences are usually small, they can add up over time, especially if you’re holding an ETF for the long term.
Lack of control
When you invest in an ETF, you’re buying a basket of assets, and the composition of that basket is determined by the ETF manager or based on the index it tracks.
This means you don’t have the ability to handpick the individual stocks, bonds, or commodities within the fund.
If one of those companies performs poorly or operates in an industry you don’t particularly like, there’s not much you can do about it.
You’re locked into owning those stocks for as long as you hold the ETF.
What factors should I consider when selecting an ETF to invest in?
Underlying index/assets
The first thing you should look at is the underlying index or assets that the ETF tracks.
Essentially, you’re investing in the performance of a specific index, sector, or asset class, so it’s crucial to understand what the ETF tracks and how it performs.
By understanding the underlying assets, you can determine whether an ETF suits your risk profile, time horizon, and financial objectives.
Expense ratio
This is the annual fee that the fund charges to cover operating expenses, and it’s expressed as a percentage of the fund’s assets.
The expense ratio directly impacts your returns – the higher the fee, the more it eats into your profits.
As a rule of thumb, always compare the expense ratio of an ETF to other similar funds.
Opting for ETFs with low fees can save you a significant amount in the long run, especially if you’re planning to invest substantial amounts or keep your investment for many years.
Tax implication
When investing in ETFs, it’s important to consider the tax implications, especially if you’re investing in foreign ETFs.
Different countries have different tax rules, which can significantly impact your returns.
For instance, investing in ETFs domiciled in the US has a 30% dividend withholding tax.
A similar ETF that’s domiciled in Ireland only has a 15% dividend withholding tax.
Understanding the potential tax burden can help you avoid surprises and ensure that your after-tax returns align with your expectations.
Currency risk
When you invest in an ETF that tracks assets denominated in a foreign currency, your returns can be affected by fluctuations in the exchange rate between that currency and the Singapore dollar (SGD).
If you prefer to avoid currency risk, you might consider investing in ETFs that are denominated in SGD or that hedge against currency fluctuations.
Before investing in an ETF with exposure to foreign currencies, it’s essential to evaluate whether you’re comfortable with the potential impact of currency fluctuations on your returns.
Liquidity
Liquidity refers to how easily you can buy or sell an ETF without significantly affecting its price.
The more liquid an ETF is, the easier it is to trade, and the closer the price you pay will be to the actual market value of the ETF’s underlying assets.
Liquidity is crucial, especially during periods of market volatility, as it ensures you can enter or exit positions without facing wide bid-ask spreads or price discrepancies.
Fund size and provider
The fund size indicates how established the ETF is in the market.
Larger funds typically offer several advantages.
For one, they tend to be more liquid because they attract more investors and trade more frequently.
It’s also important to consider the provider behind the ETF.
Choosing an ETF from a well-known provider gives you the confidence that the fund is well-managed and that the provider has the resources to keep it running smoothly.
Tracking error
This refers to the discrepancy between the performance of the ETF and the index it is designed to replicate.
Ideally, an ETF should mirror the returns of its underlying index as closely as possible.
However, in reality, slight differences often emerge due to factors like management fees, trading costs, and cash drag (when the ETF holds uninvested cash).
Therefore, it’s important to compare the historical tracking error of various ETFs when choosing between similar funds.
Distribution vs. accumulation
When selecting an ETF, an important factor to consider is whether it is distribution or accumulation in nature, as this affects how the income generated by the ETF’s underlying assets is handled.
Distribution ETFs regularly pay out any income (like dividends or interest) directly to you, the investor.
However, receiving payouts also means you’ll need to manually reinvest your dividends if you want to benefit from compound growth, which could result in additional transaction costs.
On the other hand, Accumulation ETFs automatically reinvest any income back into the fund.
Instead of receiving payouts, the income from dividends or interest is reinvested to purchase more units of the ETF.
How do I start creating my ETF portfolio?
Understand your financial goals
Are you saving for retirement, building wealth for your children’s education, or just looking to grow your savings over the long term?
Different goals require different strategies.
By understanding your specific financial objectives, you can tailor your ETF portfolio to meet those needs, whether it’s growth, income, or wealth preservation.
Determine your risk tolerance
This refers to how much volatility or potential loss you can stomach in pursuit of your financial goals.
Generally, the more risk you’re willing to take, the greater your potential returns, but also the higher the chance of experiencing short-term losses.
A good rule of thumb is to base your risk tolerance on factors like your age, investment time horizon, and financial responsibilities.
Find out what’s your ideal portfolio allocation
Your portfolio allocation should reflect both your long-term objectives and your ability to handle risk.
Or go through our free beginner investor course
If you’re feeling a bit overwhelmed or just want a more structured way to start your investment journey, our beginner investor course is the perfect place to begin.
It covers everything a beginner needs to know about investing, essentially wrapping up what we’ve discussed in this section and more.
In our course, we also teach you how to rebalance your portfolio, which is crucial for keeping your investments aligned with your long-term goals.
You’ll also receive ETF recommendations tailored for beginner investors.
I suggest reliable, cost-effective ETFs that fit different risk profiles, covering various asset classes, sectors, and regions.
Plus, we provide platform recommendations so you know exactly where to go to start investing.
Lastly, we dive into how to manage your portfolio in the long run.
So, if you’re ready to take control of your financial future but need that extra bit of guidance, our free beginner investor course is exactly what you need.
How do I get started investing in ETFs?
Getting started with ETF investing is easier than you might think.
In fact, it’s as simple as signing up for a brokerage account, topping up your account with funds, and purchasing your first ETF!
If you’re unsure where to start, check out our comprehensive guide on how to buy (US, China, Local) ETFs in Singapore!
Read our picks for the best brokerage accounts here!
Conclusion
In this post, we’ve covered everything you need to know to start ETF investing.
From understanding what an ETF is and the different types available, to knowing the factors to consider when building your portfolio, it’s all about making informed choices.
We also touched on the steps you need to take to start investing – signing up for a brokerage, topping up your account, and purchasing your first ETF.
But remember, investing isn’t one-size-fits-all.
Everyone’s financial situation is different, so it’s important to tailor your investment strategy to your own goals and risk tolerance.
If you’re feeling unsure or confused about where to start, don’t hesitate to get a second opinion.
Talking to an unbiased financial advisor can help ensure you’re making the right decisions for your unique circumstances.
Feel free to connect with one of our financial advisor partners for a free, no-pressure chat.
They’re here to help you navigate the nuances of investing and ensure your portfolio is set up for success!
