There are many different products and strategies to choose from when it comes to investing. Exchange-traded funds (ETFs) have become increasingly popular in recent years as a way to invest in a wide variety of assets in a single fund.
ETFs are similar to mutual funds in that they offer investors exposure to a basket of securities, but they trade on exchanges like stocks. It allows investors to get into and out of ETF positions more efficiently and with less cost than traditional mutual funds (explanation).
With the growing popularity of ETFs, many different choices are available for investors.
Here are nine things to consider before investing in ETFs in Singapore:
Your investment goals
Are you trying to grow your wealth over the long term or generate income in the short term? ETFs can be a good choice for either goal, but some ETFs are better suited for one than the other. Make sure to choose an ETF that aligns with your investment goals.
Your risk tolerance
Risk and return are directly related – the higher the potential return, the higher the risk. There are many different types of ETFs available with varying levels of risk. Some ETFs track significant indexes like the Straits Times Index (STI), while others invest in volatile assets like commodities or small-cap stocks. Knowing your risk tolerance will help you choose an ETF that is right for you.
Your time horizon
How long do you plan to hold your investment? Again, ETFs can be a good choice for both short- and long-term investors, but some are better suited for one than the other. If you plan to hold your investment for a few years or less, then you may want to consider an ETF that invests in more volatile assets. It will allow you to make a higher return over the short term potential.
If you plan to invest for the long term, you may want to consider an ETF that tracks a primary index like the STI. It will give you stability and potential growth over the long term.
The cost of investing
ETFs typically have lower fees than mutual funds, but there is still a cost associated with investing in them. Make sure to compare the expense ratio of different ETFs before you invest. The expense ratio is the annual fee charged by the fund manager, and it will eat into your returns.
The index or benchmark an ETF tracks
Make sure to check what index or benchmark it tracks. It will give you an idea of what kind of assets are included in the fund and how volatile it is likely to be. For example, an ETF that tracks the STI comprises 30 large Singaporean companies and is considered a relatively stable investment. An ETF that tracks small-cap stocks, on the other hand, is made up of smaller companies that are more volatile and thus carries more risk.
The country of origin
Not all ETFs are created equal. Some ETFs are only available in certain countries or regions, so make sure to check the availability before you invest. For example, many different ETFs are available in the United States, but not as many in Singapore.
The size of the fund
ETFs can range from a few million dollars to billions of dollars. Make sure to choose one large enough to be liquid (i.e. easy to sell) and has a low bid-ask spread. A small fund may not be as liquid as a larger fund and may have a higher bid-ask spread, meaning you could end up paying more when you sell.
The fund’s track record
Make sure to check its track record. How has it performed in the past? It will give you an idea of how it will likely perform in the future. Remember, past performance is not indicative of future results.
The fund manager
Who is managing the fund? Make sure to research the fund manager to get an idea of their investment philosophy and track record. A good fund manager will be experienced and have a good track record of delivering returns for investors.
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