The Singapore Exchange (SGX) plays host to 19 listed ETFs, with more expected shortly. This number makes them currently one of the top three markets for ETFs Singapore, after the US and Japan.
According to recent surveys published by The Straits Times, it has increased its attractiveness as an investment option among investors in Singapore, leading to 4 out of 10 households have invested in financial securities at least once. Investors need to understand how funds work before committing their hard-earned money to them.
Passive Index Funds
First things first, index funds are passive. That means they do not pick stocks themselves but mimic indices like the S&P 500 or any other fund manager’s strategy. Thus, these funds are inherently more stable and risk-averse than actively managed funds, where the fund managers have discretion over which stocks should be bought or sold. As such, they tend to carry lower risks of underperformance too.
ETFs are traded on the market just like any other share. They can thus be bought at any time through your brokers, so there is no need to wait for quarterly dividends or distributions that may happen only once every few months. You can buy into an ETF at all times without worrying about it being suspended or anything else because of lack of liquidity, as you would with mutual funds, which are redeemed in cash.
Mutual funds are less liquid than ETFs because they cannot purchase them unless they have money. With ETFs, if you pay in a cheque, your broker will buy the fund in the market for you. Additionally, it is essential to note that they are securities listed on stock exchanges in terms of liquidity. Thus, investors with brokerage accounts can be short-sold, provided they have enough funds in their account to cover any shorting done.
ETFs are transparent; their value is constantly updated according to their underlying indices’ closing prices throughout each trading day. Also, this means that investors know exactly how much they’re paying per unit when purchasing them since most track indices like the Straits Times Index (STI).
Since mutual funds are not traded daily but only with managers’ discretion, investors have to wait till net asset value (NAV) day, which can be as infrequent as once a month or even longer. NAV is the total assets of the mutual fund minus liabilities divided by the number of shares outstanding.
Most low-cost funds as ETFs tend to be index funds and do not require much human intervention on your part for them to operate. You’ll save on management fees which would otherwise eat into returns compared with actively managed funds which you’d have to pay a manager to manage.
Also, suppose you compare an ETF’s expense ratio with similar actively managed funds. In that case, you’d find that costs for the former are significantly lower, leading to higher returns over time than what the actively managed fund would provide.
Liquidity and Transparency of ETFs
ETFs get traded on the stock exchange, which makes them highly liquid and transparent compared to mutual funds (which at best can be sold once a day). Thus, their prices reflect the value of their underlying assets more closely than when it comes to mutual funds, where managers have discretion over price.
With ETFs being traded much like any other share in the market, investors need not worry about suspended units or distributions; that may happen only once every few months because liquidity is guaranteed even if it is done in a cheque instead of cash. Securities listed on stock exchanges can be shorted by brokerage accounts provided sufficient funds.
Investing in an EFT is one of the best means of passive investments Singaporeans have at their disposal because it provides liquidity and transparency while having low fees. If you’re looking for a simple diversified portfolio that can weather market volatility without requiring too much management, then ETFs are a great choice.