The Ultimate Checklist: How To Choose The Right Exchange Traded Fund (ETF) To Invest In?
If you have been following enough investment bloggers and the Seedly Personal Finance Community, the acronym ETF should ring a bell.
Well, ETF stands for Exchange Traded Fund, a financial instrument that was designed for passive investors.
Investing in ETFs kind of like getting Economic Rice (Cai Png). It is affordable and yet, offers a variety of “ingredients”, all neatly served on one plate. Most importantly, it fills your tummy.
- Unlike a mutual fund, an ETF is a passively managed investment fund that is traded on the stock exchange
- Since it is being traded on the stock exchange, it usually has high liquidity of buyers and sellers
- An ETF is usually passively managed to track an index, a commodity, bonds or a basket of assets like an index fund
- Due to high liquidity, the price of an ETF is expected to change frequently
- They usually have lower fees when compared to a mutual fund, making them an attractive option for investors
While we’ve talked a lot about the Straits Times Index Exchange Traded Fund (STI ETF), due to it being the most familiar ETF to Singaporeans. There are actually more than 4,000 ETFs around the globe spread across various stock exchanges.
Here’re some ways you can go about picking the right ETF to invest in.
The Ultimate Checklist: Choosing The Right ETF For You
Looking to gain exposure to the stock market with ETF but not sure how?
There is usually a long list of questions when it comes to an ETF due diligence checklist. We try to simplify them for average Singaporeans.
Evaluating The Market
A common mistake an investor makes is to try to use past stock market data to determine the performance of a fund moving forward.
Most of them fail to realise that what works in the year 2017 may not work in the year 2018 (very much like my tummy flattening workout exercises).
The first step is to be forward-looking and understand some possible changes in the year 2020, which may impact the ETF which you are looking to invest in:
What are some of the possible economic changes that are very likely to happen? How will these affect the various industries?
Knowing some of the impending changes can help investors better prepare their portfolio.
While most analysts expect market growth for Singapore to come in between 1.5% and 1.9% in the year 2020, it depends rather heavily on the performance of our manufacturing sector. On top of that, uncertainties in the region such as Hong Kong’s situation cast a bit of doubt on what is going to happen next.
Evaluating Your Personal Portfolio
Now that you have looked at the economy in the big picture, it is time to evaluate your own investment portfolio.
What kind of investor are you?
Various investors have various risk appetite. Evaluate your personal risk preference before deciding if you should go for ETF investing.
If you are the kind that has trouble sleeping when the price of your investment product fluctuates, ETF investing may not be the thing for you.
How will the addition of this ETF fit into your portfolio?
For seasoned investors, they usually have a portfolio of investment products. Hence, the factor to consider when investing in an ETF is how will the addition of new ETF affect their portfolio. Should it expose their risk to an individual sector way more than the rest, or reduce the diversification of their portfolio, they may wish to reconsider.
If this is the first ETF that you are looking to get, something more diversified might be a better option.
Evaluating The Index And ETF
An analogy on using past data to determine the ETF that will do well in future is like driving using the rearview mirror.
Start “driving” using the windscreen today! Here’s what you need to know:
What is the ETF tracking?
Knowing what the ETF is tracking can help an investor identify what sectors, companies or countries the ETF is focusing in.
It is advisable to only invest in an ETF investing in areas which you are well-versed in. Make sure to aline whatever the ETF is tracking with industries or countries that will do well as mentioned above.
The last thing you want is to invest in an ETF without know what affects the price of it and where is your money invested in.
What is the investment objective of the ETF?
The objective of the ETF should coincide with yours. it should ultimately be what you believe in.
It is pointless to invest in a Social Media ETF if you are not a fan of Facebook or Instagram.
How frequently does the ETF report their holdings?
The more frequent an ETF report their holdings, the more transparent they are to the investors.
What is the holding and weightings of the ETF?
One common mistake is to invest in an ETF based on its name.
A good example will be the Global X Social media Index ETF (NASDAQ: SOCL).
While it invests in Facebook (9.9%), Tencent Holdings (12%) and Twitter (9%), a big percentage of it (31%) is exposed to a lot of other companies which are riskier and you may not have heard of.
It is always to check out what the ETF is investing in, as any individual stock, REIT or instrument in their pool of investments can have an impact on their overall price and performance.
Also, a Gold related ETF might be vested in mining companies. With this, it means that despite the possible soaring gold price, the ETF may not do well if the mining companies do not do well.
What If Two ETFs, Both Looks Like A Good Buy?
Assuming you did your research and derive at two ETF that looks like a good buy.
Here are some of the extra factors that can help you out:
To put it bluntly, the expense ratio is how much you are putting into the fund manager’s pocket. Expense ratio excludes the brokerage commissions when you buy and sell your ETF shares. If two ETFs are really too identical, expense ratio works.
Of course, there will always be a lot of other factors involved.
At times, one should not pay a Toyota price, hoping to get the performance of a Ferrari.
If a certain ETF does not trade a certain number of shares per day, it is best to avoid it. The lack of liquidity can result in difficulty trying to sell your ETF in future. For short-term ETF traders, this factor plays an even more important consideration.
- Tracking error
High tracking error may indicate that an ETF is falling behind the index they are benchmarked with.
Of course, there can also be a time where ETF outperforms the benchmark.
The bid-ask spread of an ETF in the stock market indicates how ready a market is. The more narrow the spread is, the more it facilitates trading.
Further Reading: STI ETF
For most Singaporeans, the Singapore STI ETF can be a familiar ETF to start with, given that it is mostly vested in familiar Singaporean companies.
Here are the 30 companies which the STI ETF invests in:
|Constituent Name||SGX Identifier||STI Weight (%)|
|DBS Group Holdings Limited||D05||15.1|
|Oversea-Chinese Banking Corporation Limited||O39||11.3|
|United Overseas Bank Limited||U11||10.1|
|Singapore Telecommunications Limited||Z74||8.7|
|Jardine Matheson Holdings Limited||J36||5.7|
|Keppel Corporation Limited||BN4||4.1|
|Singapore Exchange Limited||S68||4.0|
|Ascendas Real Estate Investment Trust||A17U||3.1|
|Jardine Strategic Holdings Limited||J37||2.7|
|Hongkong Land Holdings Limited||H78||2.5|
|Wilmar International Limited||F34||2.5|
|CapitaLand Commercial Trust||C61U||2.3|
|Mapletree Commercial Trust||N2IU||2.1|
|CapitaLand Mall Trust||C38U||2.0|
|Singapore Technologies Engineering Ltd||S63||2.0|
|UOL Group Limited||U14||1.8|
|Mapletree Logistics Trust||M44U||1.7|
|Thai Beverage Public Company Limited||Y92||1.7|
|Venture Corporation Limited||V03||1.7|
|Genting Singapore Limited||G13||1.5|
|Singapore Airlines Limited||C6L||1.5|
|ComfortDelGro Corporation Limited||C52||1.4|
|City Developments Limited||C09||1.3|
|Singapore Press Holdings Limited||T39||1.2|
|Yangzijiang Shipbuilding (Holdings) Limited||BS6||1.0|
|Jardine Cycle & Carriage Limited||C07||0.9|
|Sembcorp Industries Limited||U96||0.9|
|Dairy Farm International Holdings Limited||D01||0.8|
During your free time, you may wish to tune in to this podcast by Bloomberg too!