Exchange-traded funds, more commonly known as ETFs, are a basket of securities that can be easily traded like an individual stock. Often confused with mutual funds due to their similarities, ETFs offer more versatility as they can be traded at any time of the day, unlike mutual funds. Most ETFs track a specific index and their holdings are disclosed daily.
According to Richard Siaw, the director of Southeast Asia at New York-headquartered passive thematic manager Global X ETFs, the adoption of ETFs in Singapore has grown in recent years with rising financial literacy and a wider variety of ETFs.
To be sure, the first ETF was listed on the Singapore Exchange S68 (SGX) in May 2001. The first Singapore-listed ETF to cover the Singapore equity market was the SPDR Straits Times Index (STI) ETF, which was listed in April 2002. According to SGX data, the assets under management (AUM) of ETFs doubled to over $10 billion between December 2019 and October 2023.
“The ETF is a fantastic financial structure. They are flexible, transparent, and have liquidity,” says Siaw.
Based on what he’s seen with his clients so far, Siaw says investors generally put their money into ETFs that are listed in the US, Hong Kong or in Singapore, as most local brokers offer access to those markets.
Beyond equity-based ETFs, he notes that the product has also evolved, which now includes thematic, leverage, inverse, digital assets, REITs, derivatives-based, and, in recent years, actively-managed ETFs. SGX welcomed its very own actively-managed ETF, the Lion-Nomura Japan Active ETF, on Jan 31.
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The key advantages of investing in ETFs
ETFs have gained popularity as being one of the easiest ways for investors to diversify their portfolios. They offer an uncomplicated way for investors to gain access to a myriad of investment types, such as broad and niche indices or thematic exposures.
Additionally, ETFs offer passive index-based investment strategies which are typically of lower costs as compared to actively managed funds. This provides investors exposure to a diversified selection of securities in a singular simple investment.
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ETFs also provide investors with tax efficiency, making them an attractive investment strategy. Due to their in-kind creation and redemption process, investors are able to create or redeem shares by exchanging a basket of underlying securities, minimising transaction costs.
Thematic ETFs: what are they?
Siaw highlights thematic ETFs as a rising trend in the investment world. In addition to the key advantages of ETFs, thematic ETFs facilitate exposure to dozens of companies globally through a single trade.
Thematic ETFs focus on specific industries, trends or themes such as sustainability and technology. Through thematic ETFs, investors are able to invest in themes in line with their specific interests or investment strategies.
As opposed to previous thematic investing, thematic ETFs have greater accessibility and are not just limited to experienced institutional investors.
“Thematic ETFs track indexes that take care of the security selection part of the process and can provide access to a broad set of companies around the world with exposure to a particular theme,” says Siaw.
He adds that one particular rising theme in thematic ETFs is that of artificial intelligence (AI) technology. Since its rise in 2023, generative AIs have brought about an influx of technological developments across various industrial sectors. Beneficiaries of this rising trend extend beyond chipmakers, including robotics, cloud computing, software companies and cybersecurity.
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Getting started: Tips for investing in ETFs
For those starting out, Siaw recommends beginning with broad index ETFs like the Straits Times Index (STI) ETF or The Standard and Poor’s 500 (S&P 500) ETF. These ETFs are advised to be used as stable building blocks for investment portfolios.
However, ETFs, like all securities, are not without risk.
From novices to experienced investors, Siaw offers a nugget of wisdom to individuals hoping to diversify their investment portfolios.
Instead of focusing on the ETF name, “we encourage investors to look under the hood of the ETF — methodology, how many constituents and what are the companies, track record, size, expense ratio, ETF firm and manager”, he says.
With just a few ETFs, investors can develop their investment portfolios by concentrating on broad-focus ETFs that zero in on global stocks and bonds.
