There are many investment options in the market including Exchange Traded Funds (ETFs).
ETFs are a type of fund that can be traded on an exchange like a stock, which means it can be bought and sold throughout the day. Often, they have lower fees than other types of funds -- which makes it good for beginners. Depending on the type, ETFs have varying levels of risk.
Additionally, an ETF allows you to purchase a large number of securities - stocks, bonds, or commodities, as part of your portfolio. You can think of an ETF like a grocery basket, but instead of groceries like milk and bread, in investment terms, you’ll be filling your basket with stocks or bonds. Instead of having to purchase each of these stocks or bonds individually, you’ll be purchasing the entire basket at one go.
ETFs are traded on an exchange throughout the day and there are many options for you to choose from.
We’ll share an investment guide for beginners below which contains reasons why people may choose to invest in ETFs, the different kinds available and how to start investing.
Reasons why people invest in ETFs:
1. Diversification
It’s a useful investment instrument for new investors who want stock diversification from relatively small outlays. Buying an ETF gives investors access to the performance of a larger portfolio, hence the term of diversifying your investment.
As COVID-19 proves it, no one really knows what the future holds. Hence, spreading your funds across different vehicles, industries, companies, and other categories enables you to reduce the risk of making the wrong decision and ultimately losing money.
2. High liquidity
Since this is traded on the open market, it makes them highly liquid as investors can choose to buy and sell the ETF at any time. All you need to invest in ETFs is a brokerage account and your Central Depository (CDP) account.
3. Low barrier to entry
ETFs tend to have a lower cost of purchase with lower management fees because they are passively managed and do not employ fund managers for stock selection. Moreover, as previously mentioned, there is no minimum investment amount required.
4. Wide variety available
Some are full of stocks, others hold bonds, while others also track the performance of certain market sectors - such as health care, communications or even a certain index like the S&P 500 or Dow Jone for instance. How you select your ETFs is highly dependent on your individual investment goals, preferences and what’s in your current investment portfolio.
Types of ETFs available:
1. Stock ETFs
This refers to ETFs made up of a portfolio of stocks to track an index such as S&P 500 Index (an index consisting of the largest 500 companies listed on stock exchanges in the US). Other examples include SPDR Dow Jones Industrial Average that tracks the Dow-Jones Industrial Average.
2. Bond ETFs
This one is made up of various types of bonds or fixed income products. This type is a low-risk asset class that usually appeals to risk-averse investors -- or those who prefer lower returns than higher ones, as lower return investments have lower risks.
Bonds also have generally lower returns when compared to stocks. Plus, they offer more stability to a portfolio with steady and fixed interest payments.
3. Commodity ETFs
This type of ETF consists of commodities such as gold, silver and oil. They can also cover companies that produce agricultural products such as corn, grain and livestock.
4. Sector-specific ETFs
This refers to specific sectors such as real estate, healthcare, technology or energy for example. An example of this is Real Estate Investment Trusts (REITs).
5. Country specific ETFs
This enables you to purchase stocks from specific markets. For example, if you’re looking to purchase Singapore stocks, you can refer to the Nikko AM Singapore STI ETF.
How to get started?
1. Open a brokerage account
To purchase a stock on the open market, you would first need to open a brokerage account as well as a CDP account.
To open a brokerage account, you need to be at least 18 years of age and have a bank account with one of the following banks in Singapore -- Citibank, DBS/POSB, HSBC, Maybank, OCBC, Standard Chartered Bank or UOB. You can apply for your CDP account via the SGX website.
You can also choose to apply the traditional way by filling up the CDP application form and mailing to:
The Central Depository (Pte) Limited
11 North Buona Vista Drive #06-07
The Metropolis Tower 2
Singapore 138589
2. Start a regular savings plan
If you want to opt to invest a predetermined amount monthly, you can choose to open a regular savings account.
3. Use a robo-advisor
Alternatively, you can choose to invest through robo-advisors. They offer portfolios that can be customised according to your risk profile and investment goals.
One benefit of using robo-advisors is that these portfolios are automatically rebalanced. They’re also more accessible (as long as you have Internet) and are a cheaper alternative compared to traditional advisors.
Grow your money the smart way
If you’re a beginner investor, ETFs are a great investment option. This is because new investors often don’t have the capital to buy many stocks or to build a diverse portfolio immediately. An ETF solves these by providing solid returns as well as diversification for a low cost.
With all the benefits mentioned though, you should still be aware of all the risks that it brings as the market conditions can fluctuate. If you’re still not sure how to start or what type of ETF fund to invest in, reach out to us. We can connect you to experienced people in the financial planning sector to help you kickstart your investing journey.