Exchange-traded funds are top-rated with investors because they allow them to make money off of the volatility in the market without actually having to suffer losses because of it. As of this year, there are over 1,500 exchange-traded funds (ETFs) available for investors to invest in. These 1,500 ETFs have a total value of around $3 trillion.
What is an ETF?
Exchange-traded funds (ETFs) are financial securities that can be bought or sold on a major stock exchange. An ETF is similar to the common stock of a company but trades like a mutual fund, which means it can be purchased through brokerage accounts that support mutual fund transactions. ETFs operate by tracking an index, commodity, asset class or basket of assets like an index fund.
An ETF is also a type of investment vehicle that tracks an index, a commodity or a basket of assets like an index fund. The most common examples in Singapore are the Nikko AM STI ETF and SPDR Gold Trust, which track the performance of the Straits Times Index and gold prices, respectively.
How do ETFs differ from other investments?
One major difference between ETFs and other investments such as unit trusts is that you can trade them throughout the day, much like shares on the stock market. In contrast, traditional funds only have their net asset value calculated once each ETF is usually more tax-efficient than traditional mutual funds because ETFs are passed on to the shareholders every time they get sold. This means that each round of exchange is a taxable event.
They also have lower charges compared to index funds because there are no middlemen involved in an ETF transaction. Investors can therefore enjoy lower costs and better returns at the same time.
What is the downside of ETFs?
Despite their many advantages, exchange-traded funds also come with some significant downsides that every investor should know before investing their hard-earned money into these investments.
One major downside is that managers are allowed to choose securities at their discretion, which sometimes ends up investing in high-risk firms or firms that may even be involved with criminal activity. It is a significant downside because you, as an investor, can end up losing not only your money but also your entire investment.
Conventionally speaking, there are many potential risks involved with investing your money into Exchange-Traded Funds (ETFs).
Whether you have invested your own money or you are working with an advisor to make the best investments possible, it is essential to be aware of the various risks that could potentially arise.
Risks associated with ETFs
There are two types of risks associated with investing in ETFs: risks connected with the investment’s underlying assets and their price movement.
One risk affecting ETFs is tracking errors, which happen when the return achieved by the ETF does not match up to the return achieved by the benchmark it tracks over time. For example, if the S&P 500 returns 10% over a year and the ETF only returns 9%, that would mean there was a tracking error of 1%.
Another risk associated with investing in ETFs is operational risks, which happen any time the infrastructure on the exchange where an ETF trades does not function as it should. When investors can’t buy or sell their shares as they usually would because of some technological breakdown, hardware failure or human error, this can be considered an operational risk. This means exposure to more risks than these two types could occur when investing in ETFs.
Due to these benefits of having lower costs of investment and fewer taxes paid, this has resulted in ETFs becoming very popular around the world today. It is recommended to use a reputable online broker such as Saxo Bank before you start ETF trading. You can use a demo account and practice your skills before investing your own money.