An ETF is a marketable instrument that tracks an index, a commodity, bonds, or a basket of assets like an index fund and is often called an exchange-traded fund (ETF). ETFs, like index funds, trade like common stocks on a stock market. ETFs are divided into “passively managed” and “actively managed” categories.
The main concerns about ETFs
One concern about the famous or passively managed ETFs is that they often have higher expense ratios than managed mutual funds. Yet investors flock to them because they offer diversification benefits over some more expensive mutual funds. It may allow for direct investment in sectors that would otherwise be inaccessible to some investors; however, some critics worry this lack of diversification could create more significant systemic risk in the financial markets.
Generally speaking, investors should be aware of the potential for ETFs to increase systemic risk in the economy and their transactions being more susceptible to manipulation. You can also harm investors by trading large amounts of ETFs into or out of an asset class experiencing a market panic. It’s because, unlike with mutual funds, where redemptions are usually met with some delay, investors investing in ETFs can immediately sell them off at any time.
Thanks to technological advancements like ETFs, today’s markets are more accessible than ever; this has provided consumers more options and opportunities than they’ve ever had before. While there are costs associated with these opportunities, they can begin building their portfolio toward their financial goals if used correctly. Not all ETFs are created equal, though, and investors should be aware of the different risks depending on their specific needs.
The best way to invest is to remain informed about what you’re putting your money into. Read up on the facts, research your options, and don’t let others pressure you into making an uninformed decision.
Disadvantages of using ETFs
The following are the disadvantages of trading in ETFs;
Size
Because they commonly track an entire market segment (e.g. Malaysia, Europe, etc.), ETFs can often own 100% or more of the securities in that particular index. It means that if you invest in only one ETF, you’ll probably hold all of the most popular stocks, which may not always be ideal.
Volatility
One disadvantage of using ETFs over mutual funds is price volatility. Like individual stocks, their value will fluctuate depending on how investors feel about market conditions. If you are investing in an ETF, it is essential that you know what your investment objective is and that you are comfortable with the risk inherent in your choice.
Advantages of using ETFs
The advantages of trading in ETFs are listed below:
Low cost
Because there is no need for expensive research and analysis, most ETF investors can expect to pay low fees. This means you get more bang for your buck when it comes to performance. It’s worth noting that these costs can vary widely depending on how much risk you take with your investments (a cautious investor will incur lower fees than one who has a high-risk tolerance) and on which providers you use.
Transparent
ETF management fees are usually more transparent than traditional mutual funds, making it easier for investors to decide their portfolios. It’s essential when considering different investment options, as funds with higher management fees may not necessarily be better performers.
Diversification
Buying shares in an ETF gives you instant diversification in your portfolio. It enables you to own a selection of assets representing a specific market segment or region at a fraction of the cost of buying individual securities or funds. For example, investing SGD10,000 in the popular MSCI Singapore ETF allows you to hold 15 stocks from various sectors, including finance, telecommunications, utilities and more.
Finally
Although ETFs have been around for a long time, many investors are still against investing their money this way. To help you, you can check here to find the right portfolio for you and contact a reputable online broker from Saxo Bank.
Comments are closed.