ETF Evolution – New features of ETFs

Date: August 14, 2017


Conclusion

As with any other investment product, investors should also take time to understand the product and consider whether it is suitable for them. Here are a few key things you should check before deciding whether to invest in an ETF.

1) What does the ETF track?
Do not assume that all ETFs come with low risks and are intended for long term investing. Read your prospectus and research reports to understand three key areas:

  • the investment objectives (in particular whether the specific ETF you intend to invest in is meant to track indices on a daily basis only and thus suitable for short term investing);
  • the underlying exposure; and
  • its expected returns and volatility.

2) How is the ETF structured and what does it invest in?
Remember that not all ETFs have the same structure and level of complexity. Read the “Investment Approach” and “Risks” portions of your prospectus for information on the various risks of the specific ETF you intend to invest in. Note that the risk elements may differ greatly between ETFs depending on their structure.
Do also find out:

  • Who is the Fund Manager and the Market Maker? (For e.g. manager’s track record in managing ETFs, the quality of market making by the market maker in terms of providing competitive bid/ask spread. If either fails to perform their duty due to insolvency or other considerations, liquidity in the ETF is not guaranteed.)
  • What are the trading specifications (i.e. board lot size & currency denomination)?
  • What are the expected costs (i.e. brokerage commission, management fees & expense ratio)?

3) What level of tracking error is likely to occur and how would this error impact your returns?
Ask your financial adviser or broker:

  • how you can monitor the tracking error regularly;
  • what measures are in place to manage such errors; and
  • what risks and costs come with these measures.

4) Does the ETF’s structure and risk profile suit your risk appetite and investment time horizon?

5) How does the ETF you are considering compare with other investment options?
Last but not least, if you find that you do not understand the ETF or are not comfortable with its structure and risks, do not invest in it.

This information is provided by the Singapore Management University Sim Kee Boon Institute for Financial Economics and the Monetary Authority of Singapore (MAS) as part of the MoneySENSE national financial education programme.