In this article, we explore how to invest in ETFs in Singapore.
What is an ETF?
An Exchange Traded Fund (ETF) is another financial instrument that can be loosely described as a combination between a mutual fund and a stock as there are characteristics of both. Be sure to familiarize yourself with these two financial instruments first to be able to understand ETFs better.
Why is an ETF like a Mutual Fund?
While they are both technically funds, there is one major difference between an ETF and a mutual fund. An ETF is not actively managed but a mutual fund is actively managed by a fund manager.
Many ETFs are designed to track a market index (just like an index fund discussed above). So just like an index fund, an ETF is a great natural diversified financial instrument to gain exposure to many assets.
ETFs are passively managed by ETF managers but they do not try to outperform the underlying index. Hence, ETFs have fees and charges that are usually much lower than those of actively managed mutual funds.
This is the greatest value on an ETF. You can get the exposure of an index fund but pay a fraction of the fees. In the long run, this seemingly small difference in fees can compound and run in the thousands of dollars.
Why is an ETF like a Stock?
An ETF is like a stock because it trades like a common stock on a stock exchange. You can buy and sell units of ETFs throughout the trading day. But, a mutual fund can only be bought and sold at the beginning and end of the day.
You will trade an ETF with your stock broker, just as you would a stock.
Because of the benefits and low costs of ETFs, and the inaccessibility to buy low-cost index mutual funds in Singapore, ETFs are a good alternative to form the backbone and majority of a passive investor’s portfolio.
What ETFs are available to Singaporeans?
Some popular ETFs on the SGX include the STI ETF, ABF, Gold. You can see the full list of ETFs available on the SGX here.
Note: Focus on Cash-based ETFs that invest directly into the assets that make up the index.
Do not (start) invest in Synthetic ETFs that use derivative products such as swaps or access products to produce returns which track the relevant indices. This is a much more complex and risky product because you may not fully understand what the underlying assets are. Remember, do not invest in anything that you do not understand.
You can find out the make-up of an ETF and its holdings by looking up the fact sheet and prospectus online. This applies to just about any other financial asset discussed here.
Understand more about ETFs here.
Bottom Line: As a new and/ or passive investor, cash-based ETFs will form the basis and foundation of your portfolio. Cash-based ETFs should be one of the first financial assets that you should fully understand and subsequently invest in for the long term.