One of the many forms of investments in the money markets is known as ETFs or Exchange Trade Funds. This is among the few mainstream investment engines which are known for its lower risk as compared to the more volatile markets.
What Exactly is ETFs?
To some extent, ETFs is the middle ground between unit trusts and the share market. There are certain types of similarities between the manner of investments as they are traded in the share market in the form of stocks. Typically, they are investment funds that are open-ended. This type of security integrates the characteristics of shares and index fund.
How does it work?
In ETFs, you as an investor will hold certain units of a fund and subsequently invest them into several securities which makes it cheaper and easier to invest. You only use a single transaction and can put your money in a collective group of securities. This could be in the form of commodities, equities or fixed income instruments. What you actually get is a lower risked investment as compared to owning shares. Among its traits are:
- You get exposure to a market or sector or industry
- You can trade the ETF through a standard broker on the share market. This is quite similar to investing in shares where you need to have a trading account (or CDS – Central Depository System)
- You will have to pay similar charges such as stamp duty, brokerage fees and clearing fees
Crucial Things to know about ETFs
Before you start investing in ETFs, you should know the following:
- Trading Price – this refers to the asking (sometimes called bidding) price offered by the market maker which is determined by market forces
- Net Asset Value – Known in short as NAV, this is the total of the asset minus the liabilities. It also refers to the current market value not taking into account any undistributed net income of the stock. The fund manager will usually calculate and communicate the NAV to you
- Capital Gains – This is the gain when you buy the ETF at a lower price than when you sell it (later)
- Dividends – the securities will provide dividends into the ETF basket for distribution (usually every 6 months or 12 months)
Reasons to Invest in ETFs
Due to the fact that ETFs combine unit trusts and shares, you might want to invest in this market because:
- Expand your reach – Instead of just investing into a single share and such, you now get more exposure and has wider diversification when you invest in an entire region or market.
- Affordability – ETFs, because they are passively managed are cheaper in terms of fees. This is because there is no fees upfront and comes with lower annual management fees (which is usually less than 1%).
- Flexibility – You can easily trade ETFs which can be done either online or through your broker.
- Knowledge – You will know where your money is being channeled to as they have all the information on their website
- Liquidity – ETFs have similar liquidity traits like underlying stocks where you can easily redeem the units and get your money within 3 market days.
- Real-time information
Are there risks?
Like any other form of investments, there will surely be risks involved. Take note that investing ETF means your money is at the mercy of the market dynamics. In fact, the ETF’s performance is affected by the performance of the securities directly.