What are Exchange Traded Funds?

Date: August 14, 2017

ETFs are open-ended investment funds listed and traded on a stock exchange. Similar to trading any stock, you can buy and sell ETFs through any stock broker at market price throughout the trading day.

The objective of an ETF is to track a specific benchmark such as a stock or commodity index or commodity price. As such, ETFs are passively managed by professional fund managers and their expense ratios are lower than those of actively managed unit trusts since they track and do not try to outperform the underlying benchmark.

Below are examples of assets or indices tracked by ETFs available on the Singapore Exchange (SGX):

• Commodity and commodity index – These ETFs are intended to provide exposure to only one type of commodity or a basket of closely related commodities. As such, they may not be as diversified as ETFs linked to a broad-based equity index.

• Bond index – ETFs can also track a specific bond index. These ETFs provide exposure to the fixed income market.

• Equities

– Long stock index – Some ETFs track the movements of a stock index, such as the Straits Times Index (STI). This means that if the index increases in value by 2%, the ETF is intended to increase by 2%, less any fees.

– Inverse (or ‘short’) index – These ETFs track the movements of a short index. The short index moves inversely to its corresponding long index on a daily basis. So if the long stock index drops by 2%, the short index will increase by 2% less any fees. However, this relationship holds only on a day-to-day basis. The movement of a short ETF may not be equal to the simple inverse of the long index when measured over a period of more than one day. These ETFs are generally not intended for long term investments and are generally not suitable for retail investors who plan to hold them for longer than one day, particularly not in volatile markets.

ETFs are continually being listed on SGX, covering worldwide equity markets such as Singapore, India, North Asia, ASEAN, United States, Eastern Europe, Latin America and emerging markets, as well as commodities including gold.

Get the latest list of ETFs listed on SGX on ww.sgx.com

TIP: 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 only suitable for short term investing);
– The underlying exposure; and
– Its expected returns and volatility.