Date: August 14, 2017
dvantages of ETF!
Benefits of ETFs
Diversification: Compared to stocks, ETFs on stock indices allow investors to avoid stock-picking by providing exposure to a diversified portfolio of stocks through a single transaction at an affordable price. However, not all ETFs are broadly diversified. The extent of diversification benefits depends on the constituents that make up the fund portfolio. For example, ETFs that are meant to track the performance of a single commodity or a basket of closely related commodities will not be as diversified as those broad-based equity index ETFs.
In the case of long only country indices ETFs, they retain relevant exposure to the country or market. For example, a country’s key index like the Straits Times Index (STI) for Singapore aims to reflect the economic composition and market structure of the economy. Over time, index providers adjust the indices to maintain this relevance according to the rules set in the index methodology. As such, investors holding these ETF units will be appropriately diversified.
Adding ETFs in your investment portfolio can help diversify unsystematic risk. This refers to the risk of price change due to the unique circumstances of a specific stock as opposed to circumstances in the overall market. However, as with all other investment products, ETFs cannot eliminate market risk. Refer to the section on Risks of ETFs for more information
Cost Efficiency: Compared to unit trusts, investing in ETFs is more cost-efficient as investors do not need to incur the typical sales charge of 3% to 5%. The brokerage commission paid is similar to that paid when buying or selling stocks. The expense ratios for ETFs also tend to be lower than unit trusts, usually due to the annual management fee being typically less than 1%. Management fees for unit trusts generally range between 1% and 2%.
Transparency and Flexibility: The process of buying or selling an ETF is transparent and flexible, just like trading stocks listed on the exchange. Investors can access information on the ETF prices and trade ETFs throughout the trading day. Moreover, investors can employ the traditional techniques of stock trading including stop-loss orders, limit orders, margin purchases, etc. This transparency and flexibility cannot be achieved with unit trusts as investors can only transact at one price calculated at the end of each day.
See Table 1 for a comparison of features between ETFs, stocks and unit trusts.
Table 1: Comparison of features between ETFs, Stocks & Unit Trusts
|
ETFs |
Stocks |
Unit Trusts |
|
| Diversification |
Yes |
No |
Yes |
| Sales Charges |
None |
None |
3 – 5% |
| Management Fees |
Less Than 1%* |
None |
1 – 2% * |
| Intra-day Price Transparency |
Yes |
Yes |
No |
| Traded Through Broker |
Yes |
Yes |
No |
| Brokerage Commission |
Yes |
Yes |
None |
| Settlement |
Third Business Day after Trade Date |
Third Business Date After Trade Date |
Upfront |
*ETFs and other unit trusts may have to incur other expenses, such as legal or trustee fees, which may be payable from the fund separately from the management fees.
