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What Is An ETF?

What Is An ETF?

Many Singaporeans may not know what is an ETF. An ETF here refers to an Exchange Traded Fund that tracks a particular index, e.g. STI ETF. Therefore, when you buy shares of an ETF, you are buying shares of a stock portfolio that tracks the yield and return of that index. In another words, ETFs simply replicate the performance of the index and they do not outperform the index. If you own STI ETF shares, you gain explosure to the performance of Straits Times Index.

ETF combines  the features of stocks and mutual funds to have a range of diversified portfolio and yet anyone can just trade like a single stock.  Investors generally purchase ETF shares based on several reasons as such :

  • The flexibility to purchase ETF shares on margin, short sell or long
  • Able to diversify the investment risk in a particular market
  • Lower cost of owning them as compared to managed funds
  • To hedge the market

Yet, many retail stock investors and retirees do not know what is an ETF and how such ETFs can help to grow their nests steadily over a period of time. Past research studies have shown that market indexes make better investments than managed funds and one of the best investment strategies is to buy and hold such ETFs to reap the advantages of investing in index growth. Unlike stock trading, ETF investment is usually less speculative and the investors must have the mentality to hold for a longer period.

After Knowing What Is An ETF…

I had explained about a very good investment scheme called Singapore Supplementary Retirement Scheme (SRS) in my another post. I strongly believe that it is good for have a portion of your stock portfolio to be invested in STI ETF units. In this way, you get the best of both world, i.e. tax savings as well as consistent long terms returns for your retirement funds.

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