In this article, we share all you need to know about investing in ETFs.
It’s payday!
Your paycheck has been credited into your bank account and you’ve paid off your bills and set aside a portion of your money for this month’s expenses – food, shopping, entertainment etc.
There’s still some leftover money, which being the responsible millennial that you are, will be tucked away into your trusty savings account.
And yes – having an emergency fund is excellent!
But here’s the hard truth.
If you’re relying solely on your monthly savings to achieve your financial goals…that’s going to be a tall order!
While it’s the safer route, interest rates on savings accounts don’t allow your money to grow very quickly.
In fact, the interest rates from these cash savings accounts are almost always lower than inflation….
That’s right, you’re constantly losing money!
So if you’re that 20-something Singaporean who hasn’t started investing…
You need to start ASAP.
And why is that so?
It’s all thanks to the compounding interest. Over time, your capital will grow double, triple, quadruple and so on. The earlier you start investing, the less you’ll have to save in the future!
Okay, so now that your interest is piqued and you’re nodding your head, thinking that yes, maybe you SHOULD start investing now, there’s the question of which financial instrument to put some of your hard-earned savings in.
And you may have heard of this hot investment vehicle among new and veteran investors – Exchange-Traded-Funds (ETFs).
But what are they, how are they different from stocks and how can you start investing in them?
In this article, we share all you need to know about investing in ETFs.
What Are Exchange-Traded-Funds (ETFs)?
ETFs, like stocks, are traded on stock exchanges in the exact same way, but with one key difference – stocks are now packed together into a bundle. As an investor you need only purchase 1 bundle, which would include stocks from various companies, instead of purchasing these stocks individually!
They’re managed by fund managers, and these fund managers are able to simply create an ETF based on common characteristics between stocks. For example, industry-specific ETFs, commodity ETFs, or a best performing company ETF.
So Why Would Anyone Want To Buy An ETF?
#1 Low Barrier To Entry
ETFs are a great way to ease yourself into stock investing if you’re not confident with individual stock picking . As they contain a basket of stocks, you don’t need to spend hours assessing individual stock performances, and can save time by looking at the performance of an ETF that suits your needs or interests.
#2 Low Cost
Imagine this -You’ve decided to invest in 100 different stocks individually each costing you, for example, $0.50. At the end of the transaction, you would have paid $50, and you best hope that your stocks perform well enough to at least cover your costs.
With an ETF, you need only purchase 1 bundle, which would include stocks from 100 companies. Now, instead of paying $50 for 100 different purchases, you need only pay $0.50, and still access the stocks you want.
#3 Diversification (and lower risk)
Investors enjoy the diversification provided by ETFs because you won’t have all your eggs in one basket. If you invested in a firm based on information that is publicly available, would you be able to predict if the CEO is going to resign the next day – which may potentially throw its investors into a state of panic and cause your stock to plummet? No.
On the other hand, since the value of an ETF is calculated by the average performance of its bundled stocks, it also reduces your overall exposure to loss in the event that let’s say, a CEO gets killed by a squirrel, or accidentally reveals business secrets.
#4 High Liquidity
Since ETFs are traded on the open market, you can choose to buy and sell your ETF anytime! To get started, you’ll just need to open a Central Deposit Account and sign up with a suitable investment brokerage.
So Is Investing In An ETF Or A Stock Better?
The example below highlights several key differences between ETFs (assorted chocolates) and stocks (milk chocolates).
Imagine having to choose between different 2 boxes of chocolates – assorted ones or just good ol’ milk chocolate. You would possibly pick the assorted ones under several conditions
(i) You have no preference for chocolate flavors
(ii) You are unfamiliar with chocolates because you’ve never eaten them in your life, and you would like to explore which flavours you may like,
(iii) You just want to buy a bunch of chocolates because everyone is buying it and says it’s the best thing ever
Now under what conditions would you now pick the milk chocolate? It is likely that you would pick it if
(i) You love milk chocolate
(ii) It is from a reputable brand and it’s their bestseller
(iii) It’s cheaper than the assorted one.
Picking ETFs Over Stocks
An investor would pick an ETF because he may not have any preference in stocks, or that he would like to track the performance of a specific set of stocks. Or that it is possible that the ETF might perform well – like investing in healthcare ETFs during the Covid-19 period because you know that everyone is relying on the scalable production of effective vaccinations.
Picking Stocks Over ETFs
On the other end, an investor may simply choose to purchase a stock of a reputable healthcare company that you’re confident will produce the first vaccine, based on its track record and reputation.
So What’s The Main Takeaway?
The key difference between stocks and ETFs is not that either of them is better, but that one is more suitable for you than the other based on its characteristics as well as your preference.
These characteristics can simply be generalized into the following categories:
- Risk aversion – are you willing to put all your eggs into 1 basket (ie. a stock from just one company), or would you rather spread out your assets?
- Knowledge & Personal interests – if you are working in the cryptocurrency or information technology industry, then you may have better knowledge of cryptocurrency or IT-related ETFs than most other people
- Trends and emerging economies – are there government initiatives or policies to accelerate the growth of specific industries? Is it better to invest in emerging economies like the Ho Chi Minh City Stock Exchange (HSX), or should you stick to developed economies like the Singapore stock exchange (SGX) or the New York Stock Exchange (NYSE)?
How Can I Start Investing In ETFs In Singapore?
There are 3 ways that you can get started.
Use a regular savings plan
A regular savings plan lets you invest a fixed sum (eg. $100) on repeat. This helps you accumulate your investment steadily and progressively. Just be sure to check for the price of the commission fees, and that the plan has ETFs that you want.
Examples of ETF savings plans include DBS Invest Saver and the Saxo Regular Savings Plan.
Open a brokerage account
Similar to purchasing stocks on the open market, you can also purchase ETFs on the open market. To get started, you’ll need to open a Central Deposit Account and sign up with a suitable investment brokerage.
Invest with a robo-advisor
Robo-advisors are digital platforms that provide algorithm-driven financial advice, and offer tailored portfolios customised to your preferences. Some robo-advisors that you can check out include: StashAway and Kristal.ai
The Bottom Line
Much like other investments, ETFs have their own sets of advantages and disadvantages. It’s important to be well-informed so that you can make an educated choice that aligns with your investment preference and risk appetite.
Do note that concentrating on just a single ETF sector brings you higher risk and while many of these narrowly focused ETFs have the potential to grow, you may also experience wide swings – including potentially huge losses!
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