What are Exchange-Traded Funds (ETF)?

If you are looking to build a diversified investment portfolio, consider investing in Exchange-Traded Funds (ETFs) , a basket of securities that tracks the performance of a particular index, commodity, sector, or other assets. Just like stocks, ETFs are listed and traded on stock exchanges. Since ETFs are investment funds that contain various underlying assets, they are often included in portfolios as a means of diversification and risk management.

Keep reading to learn how ETFs work and how to begin investing in ETFs in Singapore.

How do Exchange-Traded Funds (ETFs) work?

When you purchase an ETF, your money is pooled with capital from several other investors and invested according to the fund’s objectives and strategy. ETFs are typically managed by professional fund managers who ensure that the ETF’s performance matches that of the tracked index rather than outperforming it. As such, the returns on ETFs are usually more predictable than other types of managed investment funds. Moreover, ETFs provide exposure to several underlying assets, allowing investors to diversify their portfolios with lower costs and risks.

Like stocks, ETFs experience price fluctuations throughout the day and can be traded on a stock exchange anytime during market trading hours. Commonly traded ETFs may include equity ETFs, bond ETFs, industry/sector ETFs, commodity ETFs, and currency ETFs.

Tips to consider before choosing a suitable ETF to invest in

With so many ETF options available on the market, it can be challenging to select suitable ones to include in your portfolio. Here are some important considerations when selecting an ETF:

  • Tracking error: While ETFs aim to track and replicate a benchmark index, they may not be tracking the index closely enough, resulting in tracking errors. Hence, it is crucial to check if the performance of your selected ETFs is closely aligned with the performance of the tracked index.
  • Trading volume: Look into the trading volume of your selected ETFs. The higher the trading volume, the higher the liquidity and the easier you can let go of the ETF when the time comes.
  • ETF structure: ETFs track indexes by either investing in the underlying assets directly or through derivatives, which are financial contracts that derive their value or price from an underlying asset. ETF structures can be complex and may affect the risk and management cost of an ETF. 
  • ETF’s exposure and objectives: Before deciding on the ETF(s) to invest in, it is essential to consider an ETF’s exposure and objectives. Does the ETF provide access to global, regional, or country-specific assets? Does it provide exposure to your sectors of interest or specific asset classes? Once you’ve understood the purpose of the ETF, check if it aligns with your investment objectives and whether it fulfils its intended role in your portfolio.

Conclusion

While ETFs carry relatively lower risk than other securities like stocks, it is still crucial to do your due diligence before deciding on suitable ETF investment options for your portfolio. Understand that returns on ETFs are not guaranteed, and price fluctuations are to be expected in the short term. If you have any doubts, consider speaking to a professional financial advisor in Singapore to seek clarity on how ETFs may fit into your long-term investment strategy.

Disclaimer

The content reflects the view of the article’s author and does not necessarily reflect the views of Citi or its employees. Please read the products and offers on the Citi Singapore website for accuracy or completeness of the information presented in the article.

Contact Information
Sonakshi Murze
Manager
sonakshi.murze@iquanti.com


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