We previously took a quick look at Exchange Traded Funds (ETFs) and how they work. In this article, The Motley Fool shares with us how to determine whether they are a suitable investment product for you.
There are arguments for and against investing in exchange traded funds, or “ETFs”. For instance, there are those like John Bogle, founder of the Vanguard Group, who swears by the benefits of ETFs. Meanwhile, you get billionaire Hungarian-American investor George Soros, who has been openly critical about the investment vehicle in many of his books.
So, are ETFs right for you? Let’s look at some of the benefits you might get from investing in ETFs as compared to buying individual stocks.
Want to invest in Bangladesh or maybe Pakistan but do not know how? There are roughly a hundred ETFs available on the Singapore Exchange and the ETFs for the two countries’ stock market indexes, which are available here as well, can be a good place to start.
You can invest in The Straits Times Index (SGX: ^STI) or even just broad-based commodities too. So instead of investing in commodity trading companies like Olam International (SGX: O32) or Noble Group (SGX: N21) to gain exposure to commodities, we can invest directly in them through commodity-ETFs. There are also ETFs tracking bond indexes which can allow investors to quickly and easily obtain bonds as part of their asset allocation strategy.
In a nutshell, ETFs are good for investors looking for diversification quickly.
Time and Cost
ETFs also allow investors to save one commodity that cannot be replaced – time. Instead of having to go to a unit trust provider where we have to sign some forms and meet some advisors as part of the proper procedures before we can start investing in certain instances, ETFs allows us to buy into a fund at a click of our mouse. Buying ETFs thus becomes much less of a hassle.
As for cost, here’s where ETFs can shine. Say, we have $10,000 to invest. It might be a better choice to invest in an ETF instead of creating a diversified portfolio on our own due to higher brokerage costs associated with the latter.
And coming back to the bond market, a direct investment into individual bond issues can prove to be cost-inhibitive for individual investors due to the very high capital outlay required. In such an instance, bond index ETFs can certainly help provide accessibility to bonds.
Foolish Bottom Line
One downside to investing in ETFs is that you might never get the chance to “beat the market”. That is because in theory, you are investing in the market. However, if an investor prefers a less time consuming method of investing and still get the benefits of compounding over the long-term ETFs might not be a bad choice after all.
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