Exchange-Traded Funds Gaining Popularity Among Investors

Foreword from ShareInvestor

This article “Exchange-Traded Funds Gaining Popularity Among Investors” by Lorna Tan was first published in The Straits Times on 14 Oct 2018 and is reproduced in this blog in its entirety.

They see these tools as low-cost, low-risk way to diversify their investments

Exchange-traded funds (ETFs) have become a popular tool for retail investors looking for a low-cost and low-risk way to diversify their investments.

It’s that low-cost aspect that is gaining traction now, given that it is getting harder for investors to generate double-digit investment returns. Add in market volatility and you have compelling reasons to control the cost factor.

This has led to the growing popularity of ETFs globally with the number swelling to more than 5,500 from about 30 in 1999.

ETFs are investment funds listed on a stock exchange. They passively track the price movement of a portfolio of asset classes, including stocks, bonds, commodities and money markets. An ETF trades like a common stock and experiences price rises and falls throughout the trading day.

It gives individual investors who may not have the resources to directly purchase the underlying securities of an index immediate access to a passive diversified portfolio.

An ETF also provides exposure to international markets and asset classes that may be inaccessible to individual investors.

Mr Dylan Ng, head of wealth management at KGI Securities (Singapore), says ETFs are well received in markets like the United States due to their size and trading volume. US-listed ETFs recorded US$24.7 billion (S$34 billion) in net new flows for August, bringing the total for the eight months ended Aug 31 to US$175 billion.

The ETF sector had US$299 billion in net new flows for the same period last year, well ahead of the US$143 billion in the corresponding period in 2016.

“I expect more ETFs to be constructed and made available with growing popularity among investors, especially when the product matches their needs as a low-cost, low-entry barrier and diversified play,” adds Mr Ng.

The Singapore Exchange (SGX) has 52 listed open-ended ETFs that offer exposure to various asset classes as well as global financial markets. Some track single-country stock indices, others cover a broader index covering geographical regions such as the Asia-Pacific, emerging markets, Europe or the global market as a whole.

Out of the 53 (including the to-be-listed Phillip SING Income ETF), five are fixed-income focused and one is centred on commodities while 47 track equity indices. These ETFs are mostly denominated in Singapore or US dollars and can be traded in units of five, 10 or 100.

Mr Chan Kum Kong, head of products and research at the SGX, noted that ETFs are gaining popularity, with SGX-listed ETF assets under management growing by 17 per cent to $4.5 billion last year.

Retail adoption numbers are growing. Direct ETF holders have doubled in three years, and there is also a sizeable number of clients buying such funds via regular savings programmes started by banks and brokers.

“ETFs are preferred options for investors looking to diversify their investment portfolios, through a single low-cost investment on the exchange,” says Mr Chan.

“For the average individual who needs to fund Singapore-dollar liabilities, there are SGD equity, fixed income and S-Reit ETFs listed on the SGX to form a diversified retirement portfolio. Investors who wish to invest in SGX-listed ETFs can also tap their Supplementary Retirement Scheme funds.”

The Sunday Times highlights the fees, risks and factors to consider when investing in an ETF.

Fees And Charges In An ETF

Mr Jeffrey Lee, managing director and chief investment officer at Phillip Capital, says the biggest fee expense in an ETF is usually the management fee payable to the ETF management firm.

Other expenses include the cost of the ETF benchmark index provider, the trustee and custodian fees, as well as legal and audit expenses. All these add to the total expense ratio, which is typically expressed as a ratio of the total assets under management. The total expense ratio for a Singapore-listed equity ETF is between 0.3 per cent and 0.6 per cent a year.

In contrast, a typical expense ratio range for equity unit trusts here would be 1.2 per cent to 1.8 per cent. There may also be an initial sales charge of up to 5 per cent when investing in unit trusts, while investors incur only brokerage fees when transacting in ETFs, adds Mr Lee.

Advantages Of ETFs

1. Transparency And Lower Risk

There is clarity on where your money is invested. You gain access to real-time information and prices on your portfolio, and you know exactly what stocks or assets are included in the ETF you buy into.

ETFs reduce the risk that may result from investing in single stocks. Retail investors enjoy access to quality blue chips when investing in ETFs that track indices such as the benchmark Straits Times Index and S&P 500.

2. Diversification

Diversification reduces risk exposure and volatility. It is prudent to expand or vary your investments from a single instrument by buying into a basket of securities. ETFs allow you to spread your risks easily across various securities and markets.

ETFs are an alternative investment to holding cash. Make your savings work harder with better investment planning and by broadening your portfolio with different asset classes. So consider tapping equities, fixed income, commodities and alternative investments that suit your risk appetite.

3. Easy To Buy

Buying an ETF is as simple and convenient as buying a listed stock, says DBS Vickers Securities. And you can trade securities listed on foreign exchanges and invest in emerging markets conveniently.

4. Better Liquidity

An ETF offers better liquidity than unit trusts. This is because you can trade an ETF on the market during the day, while unit trusts are priced only once a day, says Mr Kelvin Goh, head of investments and wealth advisory at OCBC Bank.

5. Much Cheaper

ETFs are much cheaper than unit trusts, adds Mr Lee, which in turn means all things being equal (for example, gross performance), the end investor gets better results net of fees.