Contributed by: warriortan
1. WHAT ARE ETFs?
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.
It is being classified as a Specified Investment Product (SIP)
2. Types of ETFs
There are different types of ETFs which track different assets or indices. Some ETFs are highlighted below for discussion:
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.
Equities: 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.
Equities: Leveraged ETF – Leveraged ETFs aim to track, replicate or correspond to a multiple of the performance of the benchmark index that they track. Currently, there are more than 100 different leveraged ETFs which track commodities, currencies and various stock indexes.
It is critical to understand the time period for which the leverage applies. Each fund explicitly states this time period in its prospectus. It is important to note that the risk of loss from trading leveraged ETF can be magnified. Generally, leveraged ETFs are designed to generate the multipler results only on a daily basis. They are not designed for long term index tracking. The compounded performance of a leveraged ETF over a period of time may be significantly different from the index’s performance times the leveraged ETF’s stated multiple
3. SGX Listed ETFs on our Watchlist
Web links for more information about these ETFs:
ABF Singapore Bond Index ETF: http://www.nikkoam.com.sg/etf/abf
Ishares JP Morgan USD Asia Credit Bond Index ETF: https://www.blackrock.com/sg/en/products/251825/ishares-jp-morgan-usd-asia-credit-bond-index-etf
Ishares JP Morgan USD Asia High Yield Bond Index ETF: https://www.blackrock.com/sg/en/products/251722/ishares-barclays-usd-asia-high-yield-bond-index-etf
Nikko AM Singapore STI ETF:http://www.nikkoam.com.sg/etf/sti
4. Some Oil & Gas ETFs on US Exchanges:
If you are interested in Oil and Gas ETFs, you can find them on the US exchanges and they come in many types. Do read carefully what the ETF is about before you commit your money into it.
Below are some of the more popular ones:
United States Oil Fund
United States Natural Gas Fund
SPDR S&P Oil & Gas Explor & Prodtn ETF
Energy Select Sector SPDR ETF
United States 12 Month Oil
You can find more information about them from this website: http://www.investopedia.com/articles/investing/011416/top-5-oil-and-gas-etfs-2016-uso-ung.asp
If you are game for more riskier stuff, let me know and I can share more information with you.
Good Luck and All the Best!