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Exchange Traded Funds (ETFs): Are They The Right Investment For You?

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The Motley Fool Singapore

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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.

Instant Diversification

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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The Motley Fool Singapore

The Motley Fool (www.fool.sg) offers stock market and investing advice, showing people how to take control of their money and make better financial decisions. We also host a range of educational content, written for everyday people. We feel that the best person to make your financial decisions is you, and we want to help you take control of your own money.

  • Lionel Nicholas Ong

    After a year on from this article… how are ETF’s looking? Whats the outlook on the market?

    • markatmoneysmart

      I guess as a shared opinion that we have, the market outlook doesn’t really matter that much if you haven’t invested in ETFs for a long period of time. Personally, I’m not planning to look at my ETF performance till, say, 10 years later. Ok maybe I’ll be kaypoh and have a look. But just using historical performance from 2003-2013 as a benchmark (which includes the nonsense that happened from ’07-’09), the STI still performed at a 5% return on average.

      That being said, given that I only foresee Singapore getting more expensive, I suppose that would loosely relate to a strong showing from the companies on the STI. Of course if you are looking for something with a higher return, ETFs aren’t really the way to go, but it’s definitely a safer way to go.

      • Lionel Nicholas Ong

        ah…. thats what I thought! 😛

  • Dominik Keller

    Thank you for the article!
    What’s the cheapest way to purchase etfs? Are there any etf savings plan available where you could invest a fixed amount of money at a regular interval into, let’s say, an Msci world etf? I know that some banks offer saving plans to invest into the Singaporean market but I am looking for greater diversification. As I’m just starting to save money I don’t have a big lump sum available and I’d like to make use of the cost average effect while avoiding excessive trading fees.