Exchange-traded funds have become a popular financial instrument to invest in for both new investors and experienced ones. The global ETFs market will double by 2023 to the US $12 trillion. ETF is ideal for retail investors, but it is a great investment tool for Robo-advisors. Find out more on the best robo-advisors in Singapore.
Investing in ETFs is similar to buying shares. You will need to buy your ETF through your broker or an investment app. It is essential to perform your due diligence before investing in ETFs in Singapore. Here is a complete guide on how to buy ETF in Singapore.
What Is an ETF and How Do They Work?
Exchange-traded funds consist of securities on the stock exchange, including bonds, stocks, and commodities. An ETF tracks the performance of an index such as the Straits Times Index (STI) or the S&P 500 Index and is a significant asset for passive investing.
ETFs are listed on financial markets, including the Singapore Stock Exchange (SGX), NASDAQ Hong Kong stock exchange, and the New York Stock Exchange. The STI tracks 30 companies listed on the SGX so that you can invest in a single product call and STI ETFs rather than retail investors investing in individual stocks on the stock markets. ETFs have other underlying assets other than shares.
ETF tracks the performance of indexes in different sectors and asset classes. Since they are listed on the stock exchanges, you can buy and sell the ETFs like other stocks and bonds listed on the stock exchanges.
Should I Buy an ETF?
ETFs are an excellent financial instrument to invest in. Here are some of the reasons why you should consider investing in ETFs:
1. ETFs Are Highly Liquid
Exchange-traded funds are traded on the open market. This means that they are highly liquid, and investors can choose to buy and sell the ETFs anytime. You will require a brokerage account and a Central Depository account to buy and sell ETFs.
2. ETFs Are Pretty Diversified
ETFs are a great way to ease yourself into investing if you are new to investing. If you are not yet confident in choosing the right stocks, ETFs provide exposure to different sectors in the market and various financial tools, including bonds. This will help you diversify your portfolio at an affordable cost. Once you diversify your investment, you reduce the risk of losing your investment since they are not all in one asset.
3. ETFs Have A Low Entry Barrier
Once you invest in ETFs, you can invest in the best-performing stocks at a fraction of the prices. The best part is that ETFs do not have a minimum investment amount for you to start investing. Purchasing some of the stocks individually for your portfolio can be pretty expensive for a retail investor compared to investing in ETFs that have a collection of assets.
4. There Are Many ETFs To Choose From
There are thousands of ETFs to choose from in the market. ETFs form different geographies, asset classes, industries, and stock exchanges. You need to select the ETFs based on your preferences and investment goals. It is essential to conduct your research well before investing in an ETF.
5. Provides A Passive Investment Approach
Investing in exchange-traded funds (ETFs) allows you to support and wait for your investment to make you money. You do not have to keep timing the market to beat it, and you will earn the market returns over a long time.
Investing in ETFs means that you do not need to monitor your investment closely. The ETF automatically rebalances; it is automatically replaced if an asset does not work on the ETF.
Check out our guide on how to buy the best ETF in Singapore and also a guide on crypto ETF.
What Do I Need To Consider Before Buying an ETF?
Before you decide to invest in Exchange-traded funds (ETFs), you must conduct your research and understand what you are investing in. Here are some factors to consider before you invest.
1. Your Investment Strategy
Before investing in exchange-traded funds (ETFs), you have to know the right investment strategy to take you on the right path and fit your investment objective. This is the most effective way to choose the right ETFs for your investment portfolio.
All ETFs from index funds, geographical and commodities ETFs have different results. Therefore, you must ensure that you choose one that perfectly fits your investment objectives.
2. The ETF and Its Underlying Assets
You will also need to consider the underlying assets of the ETFs that you want to invest in. View the ETF from the point of diversification. It is best to invest in an ETF with a broad base that is widely followed rather than investing in an obscure index with a narrow industry and geographic focus.
3. Tracking Error
ETFs track their underlying indexes closely, and some do not follow them as closely as they should. It would help if you chose an ETF with a minor tracking error. A low tracking error means that the ETF is closely tracking its assets.
4. The Trading Activity
You should also check if the ETF has a sufficient trading volume daily. The trading volume of the most popular ETFs runs into the million daily. Some ETFs barely trade in a day. If an ETF has a high trading activity, it has high liquidity and, consequently, the tighter the bid-ask spread. There are important considerations when making the consideration to leave an ETFs.
5. The Market Position
It is important to note that the first ETF issuer of a specific sector is likely to get the market share before other issuers. While investing, avoid ETFs that are an imitation of the original idea. They might find it hard to differentiate themselves from their rivals and attract investors.
6. The Costs, Fees, and Commissions
ETFs are a powerful financial instrument, but you must weigh the costs of the ETFs against similar investments, including mutual funds and indexes. Online trading platforms offer commission-free trading ETFs today that you can also consider.
7. Expense Ratio
Some ETFs are close-ended and will carry an extra portfolio management fee known as the expense ratio. If you have actively traded ETFs, including those commissions in your cost calculations. Even when the trading is free, always be aware of the bid-ask spread. It is essential always to be aware of all the costs of purchasing an ETF.
How Can I Buy an ETF in Singapore?
If you are now ready to start investing in ETFs, here are the main ways you can start investing in ETFs in Singapore:
1. Open A Brokerage Account
Investing in ETFs is similar to investing in other assets on the SGX. You will need first to open a brokerage account and a CDP account to start trading. Once you open a brokerage account, you can start investing in the ETF of your choice at the price that you would like.
2. Start A Regular Savings Plan
With a regular savings plan(RSP), you will invest a predetermined amount every month. With as little as $50, you can start investing.
An RSP will encourage you to make regular investments and allow new investors to get started. DBS/POSB Invest Saver are among the RSPs you can start with that will enable you to invest in ETFs like the ABF Singapore Bond Index Fund and Nikko AM STI ETF. Other providers such as FSMOne and dollorDEX allow you to start an RSP while investing in your preferred ETFs.
3. Invest with A Robo-Advisor
Almost all Robo-advisors have customized portfolios to fit your investment goals, risk appetite, and preferences. These portfolios automatically rebalance.
Some Robo-advisors, such as Autowealth and Stashaway, have ETF curated portfolios. They allow you to own a portfolio with different ETFs through one investment with the platform. It is also essential that not all Robo-advisors invest in ETFs. So before you sign up for any Robo-advisor for ETFs, you must first check if they offer the option.
What Are the Risks of Investing In ETFs?
Like any investment asset, ETFs have their risks. Here are the risks associated with investing in ETFs:
1. Foreign Exchange Risks
You will be exposed to the foreign exchange risk if you invest in an ETF whose base currency is different from your own—some ETFs trade in another currency from the underlying asset. Before you start investing in an ETF, this is a factor to consider and see if the investment is worth the risk.
2. Market Risk
You will be exposed to the volatility of a specific benchmark tracked. For example, the ETF that tracks the performance of the Straits Time Index (STI) is directly affected by the price fluctuations of the Singapore stocks in the index.
3. Tracking Error
Sometimes changes in the ETF NAV may not correspond with the difference in the underlying index. In other instances, in cash-based ETFs, the fund manager may not be able to buy and sell component stocks in the exact proportions.
In other cases, the financial manager might not be able to keep up with the market changes. Other factors that might affect the tracking error include investment constraints, execution costs, and timing differences.
4. Liquidity Risk
The designated market makers will provide liquidity in ETFs and provide continuous bid-ask prices throughout the trading day. If the market makers do not perform their duty, the liquidity of the ETF might disappear, making the ETF units hard to sell.
5. Security Lending Risks
In some cases, the assets held in cash-based structures may be used for secured lending. You may be exposed to the risk that the borrower of the securities default and might not return the securities. ETFs traded prices not reflective of the NAV per unit. The ETF trade price might not reflect the respective NAV. The traded price may be subject to the market demand and supply.
What Are the Different Types of ETFs Available?
Here are the different types of ETFs that you might want to invest in:
1. Stock ETFs
Stock ETFs are made of a collection of stock indexes such as the S&P 500 index. An excellent example of such an ETF is the SPDR S&P 500 ETF. An ETF is made up of the stocks included in the S&P 500 index and the SPDR STI ETF that tracks the performance of the STI index. The S&P 500 index consists of 500 of the largest companies listed on stock exchanges in the US.
2. Bond ETFs
These are made of bonds and fixed-income financial products. These are low-risk asset classes that are ideal for risk-averse investors. They have lower returns, but they provide stability to a portfolio.
3. Commodity ETFs
These ETFs consist of assets such as silver, gold, and oil. Commodity ETFs can also include companies that produce agricultural products such as grain, corn, and livestock.
4. Sector Specific ETFs
Some ETFs will enable you to invest in a specific market sector. A good example is the Real Estate Investment Trusts (REITs)
Which at The Top ETFs To Invest in Singapore?
1. Phillip SGX APAC Dividend Leaders REIT ETF (SGX: BYJ/BYI
2. NikkoAM-StraitsTrading Asia Ex Japan REIT ETF (SGX: CFA/COI)
3. Lion-Phillip S-REIT ETF (SGX: CLR)
4. CSOP iEdge S-REIT Leaders Index ETF (SRT/SRU)
5. ICBC CSOP FTSE Chinese Government Bond Index ETF US$D
ETFs offer retail investors a chance to invest in the highest-performing stocks at a low entry price. They provide a low-risk option for both new and experienced investors. ETFs are a worry-free financial investment tool where you can put your emergency fund since they are highly liquid. You must perform your due diligence before you decide to make any investment.
- ETFs track the performance of an underlying index such as the Straits Times Index and S&P 500 index.
- Investing in ETFs is similar to investing in stocks; you need a brokerage account and a CDP account.
- ETFs are listed and traded on the Singapore Exchange.
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