What it is
Exchange traded funds (ETFs) are investment funds that are listed and traded on a stock exchange. Your money is pooled with money from other investors and invested according to the ETF’s stated investment objective.
How it works
An ETF typically aims to produce a return that tracks or replicates a specific index such as a stock index or commodity index.
Such index tracking ETFs are passively managed by ETF managers and do not try to outperform the underlying index. Index tracking ETFs have fees and charges that are usually lower than those of actively managed investment funds.
ETFs may have complex structures. They may be structured as cash-based ETFs or as synthetic ETFs, which involve the use of derivatives.
Note: Many ETFs have been categorised as Specified Investment Products (SIPs). You will need to meet certain requirements to invest in them. Check with your financial institution whether the product you are considering is an SIP.
Returns of ETFs
You invest in an ETF by buying units in the ETF. There is capital gain when the price of the units rises above the price paid for them. Some ETFs also pay dividends.
What’s the most you can lose?
ETFs are not principal-guaranteed. You may lose all or a substantial amount of the money you invested in certain situations. The risks of investing in ETFs are described in the prospectus and product highlights sheet.
Why invest in ETFs?
There are many ETFs to choose from. If you buy an ETF which tracks a stock index, you gain exposure to the performance of the index. For example, investing in an ETF that tracks the Straits Times Index (STI) provides investors with exposure to the Singapore market.
Here are a few advantages of investing in an ETF:
- You can gain exposure to an index without having to invest in all its component stocks.
- Fees and charges tend to be lower than for actively managed investment funds, as ETFs have lower management fees. There is also usually no sales charge, although if you buy and sell ETFs on the SGX, you would need to pay the applicable brokerage commissions or transfer taxes.
- As ETFs are traded on a stock exchange, you can buy and sell units of ETFs throughout the trading day