What is an ETF?
An ETF, or exchange-traded fund, is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. Unlike mutual funds, an ETF trades like a common stock on a stock exchange.
For example, the STI ETF as seen in the illustration below tracks the top 30 companies in Singapore which consist of familiar names like DBS, OCBC, SingTel etc.
However, as heavily debated in the SG Personal Finance Community, one would admit that just betting your life’s investments in the Singapore growth story would be myopic and undiversified. Hence, we shall look at other markets ETF. For example, in the USA, the S&P500 tracks the growth of 506 of the US top performing companies across industries like IT, Finance and Entertainment. You can refer more to the importance of overseas market diversification where we discuss this in detail.
TD; LR: Invest in Low-Cost ETFs
Costs associated with ETFs mainly include the transaction fee when you buy a stock of that ETF. The expense ratio is the annual fee that all funds or ETFs charge their shareholders. It expresses the percentage of assets deducted each fiscal year for fund expenses.
You should look for:
- Expense ratios below 0.4%
- Markets outside of Singapore
- A diversified industry base
Further Reading: Why ETFs fits these criteria well
I generally advocate buying ETF as a beginner’s investment strategy because it fulfills the following:
- It has the lowest expense ratio when you compare it across other funds
- It is highly diversified across different industries
- It is the performance indicator for fund managers.(i.e fund managers always compare themselves to the index)
- Picking a mutual fund that will win the index is really random, you cannot ensure it
|Vanguard ETF VOO (USA)||0.04%|
|Nikko AM STI ETF (SG)||0.35%|
|Robo Advisor||0.2 - 0.8%|
|Mutual Fund, Unit Trust||1 - 3% or more|
What should you look for when you buy an ETF?
1) ETF Composition
What is region or companies ETF buying – this is important as you will want to diversify your holdings by sectors and region. e.g Holding NIKKO AM ETF exposes you to only Singapore stocks whereas holding on to Vanguard VOO ETF expose you to only US stocks. You will likely want exposure to both.
2) Expense Ratio
Expense ratio as mentioned above is a critical component as this can really eat into your returns over a long period of time.
An Example: Comparing ETFs vs Robo vs Unit Trusts
As illustrated below, we compare the following products for an initial investment of $100k:
- Vanguard VOO ETF: A US based ETF that tracks the S&P 500 as described above (cost = 0.04% p.a)
- STI ETF: A SG based ETF that tracks the STI (straits times index) of the top 30 companies (cost = 0.35% p.a)
- Robo Advisor: A ETF fund that diversifies your investment into global ETFs (cost = 0.50% p.a for $100k)
- Unit Trust 1, 2 and 3: Various active funds managed by teams (cost = 1%, 2%, 3% p.a)
The conclusion is clear and shows that a high expense ratio can easily cost you half a million ($562k) over a period of 30 years.
How to buy these low-cost ETF?
Most of the ETFs described above are listed on the US stock exchange like NYSE. You will need a broker to access these markets.
You would buy them like how you buy an Apple shares from the US stock exchange. You can simply head over here to find out more about how you can start investing in these markets. If you have a question, simply head over to the Personal finance community (SG) and ask away!
Some ETFs commonly considered :
Here is a list of common overseas ETFs for you to consider on this platform by the ETF Database.
|Symbol||Name||Expense Ratio||ETFdb.com Category|
|SCHB||Schwab U.S. Broad Market ETF||0.03%||All Cap Equities|
|SCHX||Schwab U.S. Large-Cap ETF||0.03%||Large Cap Blend Equities|
|ITOT||iShares Core S&P Total U.S. Stock Market ETF||0.03%||All Cap Equities|
|VTI||Vanguard Total Stock Market ETF||0.04%||All Cap Equities|
|IVV||iShares Core S&P 500 ETF||0.04%||Large Cap Blend Equities|