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What is an ETF? Well, ETFs are extremely popular among Singapore investors, and it’s not hard to see why.
Instead of painstakingly researching individual stocks and spending a fortune to diversify your portfolio of stocks, investing in an ETF (that’s exchange-traded funds) lets you track the performance of a whole basket of shares.
For this reason, ETF trading is ideal for newbie investors who’re just starting to build a portfolio.
In this article, we’ll cover what you need to know to get started on ETF trading right away and some ETFs to look out for.
What is an ETF?
An Exchange-Traded Fund, or ETF, is a type of security that can be traded on an exchange such as the Singapore Stock Exchange (SGX).
An Exchange-Traded Fund is an index that tracks the performance of a basket of securities like stocks. By buying units of an ETF, you’ll get to track the prices of not just one single stock but a more diversified basket of many.
In Singapore, the most well-known example of an ETF is probably the SPDR Straits Times Index ETF (STI ETF). This ETF tracks the top 30 SGX-listed companies, which at the moment include household names like DBS, OCBC, UOB, SingTel, ComfortDelGro and Singapore Airlines.
How about an ETF vs stock?
Stocks are shares of ownership of an individual company. If you own stocks in a particular company, it means that you technically have part ownership, however small, of that company, and the value of your stock corresponds to the value of the company.
In the case of equity ETFs, which deal with shares, the ETF is an index tracking the value of a basket of shares. If you invest in the ETF, you don’t actually own a part of any of the companies it is tracking (the fund provider running the ETF, on the other hand, usually does own the shares in the same proportions as the index). Nonetheless, as a trader, you can still make a profit or loss on the price of the Exchange-Traded Fund.
Why do people engage in ETF trading?
In ETF trading, you get a portfolio of multiple securities from the get-go, and are thus considered less risky than buying individual stocks. Even if one of the stocks being tracked by the ETF tanks, it is but one in a basket of other securities.
Because of that, Exchange-Traded Funds offer an accessible way to diversify your portfolio. For instance, the STI ETF gives you exposure to 30 shares for a much lower price than you having to actually buy 30 separate batches of shares.
ETFs are just as liquid and can be traded like shares. Just as with shares, you can buy and sell units in an ETF on an exchange such as SGX using your brokerage’s trading platform.
What types of ETFs are there?
There are many types of ETFs depending on the types of securities you wish to gain exposure to as well as factors like sectors and so on.
Here are some of the most common ones you might come across.
- Equity ETFs: Equity ETFs typically track stocks. Some equity ETFs focus on certain geographical regions and sectors, while others might track companies with certain characteristics. For instance, an ETF might focus on companies in a certain sector, that fall within a certain market-cap range or that pay dividends.
- Bonds/fixed income ETFs: These ETFs have a portfolio of bonds or other fixed-income instruments, and usually pay dividends.
- Commodity ETFs: These ETFs track the performance of physical commodities like precious metals, oil, sugar and so on.
- Index ETFs: These seek to mimic benchmark indices like the S&P 500 or the Dow Jones Industrial Average.
- Currency ETFs: These offer exposure to currencies or baskets of currencies.
- Real estate ETFs: Also known as Real Estate Investment Trusts (REITs), these dividend-yielding ETFs have a portfolio of real estate assets which generate income.
- Financial ETFs: These track the performance of indices and companies in the finance sector.
In addition to the above, there are a plethora of specialty funds catering to a wide variety of investment strategies, such as leveraged funds, which can multiply your returns (and losses).
How do I choose an ETF that could be profitable?
Nobody can predict for certain how an ETF will perform in future, but looking to the past can hold clues. Your brokerage platform should give you access to indicators such as historical performance and past returns so you can see how the ETF has performed to date or during a specific period.
Check the ETF’s expense ratio
You should also check out the ETF’s expense ratio to see how expensive it is. Since ETFs are managed by fund companies, the latter will collect a fee of sorts which is factored into the price. Therefore, the expense ratio of an ETF is its cost to you, the trader. Unless you have a lot of confidence in an ETF’s performance, avoid those with high expense ratios. If you’re the kind of person who likes a good deal, try not to go over 0.7%.
Understand your investment strategy
Before picking ETFs, it would be helpful to understand broadly what kind of investment strategy you’re using, or what holes in your portfolio you’re trying to fill. For instance, if you’re looking for passive income through dividend-bearing ETFs, REITs can be a good choice. If you’re looking for something to balance risk in your portfolio, a bond ETF might be appropriate.
What price are you willing to pay?
If you’re investing according to a dollar-cost averaging strategy, you can enter the market right away. Otherwise, look at the historical performance of the ETF and figure out what price you’re willing to pay. If your trading platform allows, you can programme a purchase when the ETF hits a certain price.
Here’s a tip! You can use a function like an ETF screener to filter ETFs based on your search criteria, such as the one offered by FUTU moomoo. For instance, if you prefer to be on the safe side, you can filter your search results to display only ETFs from stable geographical locations like Singapore, with expense ratios below a certain figure.
Some ETFs to take note of
If you’re wondering what ETFs to look out for, you can search for “ETFs” on the FUTU moomoo app, and you can access a list of the ETFs where you can click on each ETF to view news, analyses, summary in its “detailed quotes” page.
Here are some of the common ETFs people are trading these days, based on trading volume.
- ProShares Ultra VIX Short-Term Futures ETF (UVXY): Tracks the S&P 500 VIX Short-Term Futures Index which measures the returns of a portfolio of monthly VIX futures contracts.
- PowerShares QQQ Trust (QQQ): Tracks the Nasdaq 100-index, which contains many tech stocks.
- Vanguard S&P 500 ETF (VOO): Tracks 500 of the biggest companies in the US.
- SPDR S&P 500 ETF (SPY): Tracks the Standard & Poor’s 500 Index comprising 50 large-cap and mid-cap stocks in the US.
- iShares Core S&P 500 ETF (IVV): Tracks 500 of the biggest companies in the US.
- Vanguard Total Stock Market Index Fund (VTI): Tracks performance of the CRSP US Total Market Index, which has a diversified portfolio of large-, mid- and small-cap US stocks.
- Kraneshares CSI China Internet ETF (KWEB): Tracks Chinese software and IT stocks.
- Financial Select Sector SPDR Fund (XLF): Tracks the Financial Select Sector Index, featuring finance sector companies that appear on the S&P 500.
- Semiconductor Bull 3X (SOXL): Leveraged ETF offering three times the results of the ICE Semiconductor Index, which tracks 30 largest listed companies in the US semiconductor industry.
- Ishares Russell 2000 Value ETF (IWN): Tracks an index composed of small-cap US equities.
- ARK Innovation ETF (ARKK): Tracks companies engaged in disruptive innovation, including those dealing with DNA, robotics, AI and fintech.
How to trade ETFs in Singapore?
To start your ETF trading journey in Singapore, your first step is to sign up with a trading broker such as FUTU, on its platform moomoo. Once your account has been set up, you can place trades using your broker’s online platform.
If you don’t have a brokerage account, you can also get exposure to ETF trading through a robo-advisor or a regular shares savings plan. However, if you take this route, you might end up paying higher fees and have less control over your investments.
How to choose an ETFs trading broker?
When picking a trading broker, one of the most important things to compare is the fees as high fees can eat into your profits.
Another factor to consider is the trading platform of the broker. If you’re a beginner, look for a platform that is intuitive and easy-to-use, yet has all the functionalities you need to trade ETFs successfully.
Looking for a broker that ticks all these boxes? FUTU SG offers some of the most competitive fees in Singapore and has all the features you need to trade Singapore, US, HK and mainland China ETFs. The sign-up process is quick and easy and the app is a breeze to use, which makes it a great choice for beginners.