Exchange-traded funds, or ETFs, have become very popular in investing as they offer a viable alternative to traditional investments like stocks and bonds. ETFs comprise various underlying assets, including stocks, bonds, commodities, currencies and other instruments. They provide investors low-cost access to diversified portfolios, allowing them to benefit from passive and active investing strategies.
Passive investing
Passive investing is a long-term strategy that seeks to generate returns by tracking an index or benchmark. The goal is to provide steady returns over time through minimal trading activity, which reduces overall costs. ETFs are particularly useful for passive investors seeking exposure to broad markets or asset classes without actively managing their portfolios. ETFs provide low-cost access to a wide range of markets and asset classes that are otherwise difficult to replicate.
Active investing
In contrast, active investing seeks to generate returns over the benchmark by capitalising on short-term opportunities in the market through frequent trading activity. ETFs offer investors an efficient way to invest actively in stock, bond and commodity markets. Instead of buying individual stocks or bonds, investors can purchase ETFs which comprise multiple securities from the same sector or industry. It allows investors to gain exposure to more significant assets without incurring high transaction costs associated with managing a diverse portfolio.
Additionally, active investors can benefit from greater liquidity offered by the exchange-traded funds market as they can be traded during regular market hours. It makes them attractive to short-term traders seeking capitalising on particular asset price fluctuations. Moreover, ETFs are subject to lower capital gains taxes because investors own a basket of securities rather than single assets.
What are the risks of trading ETFs
The risks associated with trading ETFs in Singapore depend on the type of ETF and the underlying asset. Generally, ETFs have a higher risk due to their lack of diversification, comprising just one asset or sector. Investors could be exposed to higher volatility due to market movements in that sector or asset class.
In addition, trading ETFs can be more complex than traditional stocks and bonds due to their underlying composition. Investors in Singapore need to understand the nature of the ETF and its holdings before investing to avoid excessive losses through a lack of familiarity with the product. Furthermore, as with any investment instrument, there is always the potential for counterparty risk when investing in ETFs, which could lead to significant losses if an issuer defaults on payment obligations.
Investors should also note that specific fees may be applicable when trading ETFs in Singapore, such as brokerage fees for each trade and exchange fees levied by the Singapore Exchange (SGX). Additional costs may also be associated with maintaining an account at a particular broker or custodian. Furthermore, capital gains tax may be applicable depending on how long investments have been held and individual circumstances.
Investors need to research before investing in any financial instrument, including ETFs and consider all related risks before making any decisions. Professional advice should always be sought where necessary.
How to invest in ETFs in Singapore
ETFs in Singapore can be purchased through a broker or custodian. When selecting a broker, investors should consider the fees, the types of instruments available and ease of use. Investors must also open an account with the selected broker to access the ETF market.
Once registered, investors can select an ETF that best suits their investment objectives and risk profile before placing an order on the exchange. Orders may take several days to be executed, depending on factors such as liquidity and pricing spreads. Investors should monitor their positions over time and adjust their portfolios when necessary.
Conclusion
ETFs offer both passive and active investors an efficient way to gain exposure to multiple asset classes without incurring high costs or having to manage a diversified portfolio. They provide low-cost access to broad markets, allowing investors to benefit from long-term returns and short-term opportunities with minimal trading activity and associated costs. Ultimately, ETFs can be used by both passive and active investors as part of their overall investment strategy for successful investing.
