ETFs, or exchange-traded funds, are a type of mutual fund whose shares represent ownership in a portfolio of assets such as stocks or bonds. The price of ETF fluctuates throughout the day in response to supply and demand.
In Singapore, ETF trading has become increasingly popular in recent years. One reason is that Singapore’s stock market is among the most liquid globally. This liquidity allows investors to buy and sell ETFs rapidly and at low costs.
Another reason for the growing popularity of ETF trading in Singapore is that the government has encouraged more people to invest in riskier assets. To this end, the government has been lowering the barriers to stock investing, including reducing the minimum trading lot size and making it easier for retail investors to buy ETFs.
The pros of ETF trading
The benefits of ETF trading in Singapore are numerous, and new investors should take note of the main benefits.
ETFs offer a low-cost way to invest in a diversified portfolio of assets. This is because ETFs typically have lower management fees than traditional mutual funds.
Liquidity and flexibility
Second, ETFs provide investors with liquidity and flexibility. Investors can buy and sell shares of an ETF on an exchange whenever they want, which gives them greater control over their investment portfolio.
Third, ETFs are tax-efficient vehicles that can help reduce the overall tax burden of an investor’s portfolio. This is particularly important for Singaporeans, who pay a prevailing tax rate of 20% on their income and Capital Gains Tax (CGT) of 15% on their capital gains.
Simple and cost-effective
Finally, ETF trading is cost-effective and straightforward because it does not require the purchase and sale of foreign currencies. Investors can buy and sell ETFs through any online brokerage account.
Cons of ETF trading
Despite its benefits, there are also risks associated with ETF investing that investors need to be aware of. The key risks are as follows:
ETFs are exchange-traded, and therefore, investors are exposed to the credit risks of the ETF providers. If the ETF provider defaults on its obligations, investors may not recover their investment losses.
The prices of ETFs can be highly volatile, and it is not uncommon for them to swing by 5% or more in a single day. This could lead to significant losses if an investor is caught on the wrong side of the trade.
ETFs are traded like stocks, and hence, they can be easily bought and sold on stock exchanges. However, this also means that ETFs could be more susceptible to market fluctuations than mutual funds. Low liquidity may lead to difficulty entering and exiting the position, resulting in significant losses.
Risks of replicating indexes
ETFs are often index fund replacements due to their lower fees, high liquidity, and investors’ ability to enter and exit the market at ease. However, investors need to know that ETF providers can only replicate an index passively without any management involved. This means that a structural change in an underlying company of a particular industry could affect the entire industry.
Country specific risks
Some countries have low liquidity or even poor infrastructure, making them less attractive destinations for ETF investment. For example, the Vietnamese stock market is still in its early stage of development. It has low liquidity, leading to higher-than-average spreads and increased tracking error for ETFs that invest in this market.
ETFs that invest in foreign markets will be exposed to currency risks if the underlying currencies depreciate against the investor’s home currency. This could lead to losses if the investment is not hedged correctly.
Investors in Singapore should consider ETF trading as an alternative to traditional stock investing. While this market is still relatively new, it has great potential as more people become aware of its benefits, such as easy access and low costs. If you are a new investor, we recommend using a reputable online broker from Saxo Bank to help get you started in your investment journey. For more information, you can check here.