Exchange Traded Funds

ETFs are open-ended investment funds listed and traded on a stock exchange. They aim to track, replicate or correspond to the performance of an underlying index or asset. ETFs provide access to a wide variety of markets and asset classes. 

Similar to trading any stock, you may buy or sell ETFs through your stock broker or through your own online trading account.

ETFs are similar to unit trusts as ETFs allow for diversification and professional management. But unlike unit trusts, there are no performance fees for ETFs. Investors pay lower management fees because ETFs employ a passive indexing strategy that aims to allow investors to access capital markets and commodities in an efficient manner.

To achieve the index tracking objective, a fund manager may adopt one or more of the following strategies:
(i) full replication by investing in a portfolio of securities that replicates the composition of the underlying index;
(ii) representative sampling by investing in a portfolio of securities that has a high correlation with the underlying index, but is not exactly the same as those in the index; or
(iii) synthetic replication through the use of financial derivative instruments to replicate the index performance.

Some ETFs are being classified as a Specified Investment Product (SIP).

 

Benefits

  • Efficient – lower cost compared to mutual fund
  • Transparent – listed on exchanges, intra-day price is available
  • Flexible – trades like stocks, and comes with portfolio diversification advantage
  • Easy access to closed door markets, such as India, China, Middle East, Latin America, etc
  • Easy access multiple assets classes, such as commodities, equities, fixed income, private equity, real estates, gold & silver etc
  • Dividend payouts for selected ETFs

Risks

  • No capital guaranteed
  • Counterparty risk
  • Market risk
  • Tracking error
  • Liquidity risk
  • Trading at discount/premium
  • Foreign Jurisdiction(s) risk
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