Singapore-based financial blog that aims to educate people on personal finance, investments, retirement and their Central Provident Fund (CPF) matters.

Monday, 2 March 2015

ETFs are the New Kings


In recent years, there has been a lot of people saying that 'Cash is King'.
Especially now where most markets have hit new highs and interests are at all time low.
However, if you are looking to invest for your retirement or for the long-term, staying invested is key, and there is no better instrument than ETFs!

ETFs are Exchanged Traded Funds.
They are basically funds that are traded on an exchange.
You can buy these ETFs just like buying stocks.

Benefits of ETFs:
1) Diversification -  1 fund investments in many securities, spreading out the risks associated with individual stocks. Eg; a Financial ETF will invest in almost all financial stocks (usually market weighted), which lowers your individual stock risk. As Warren Buffett says, "Diversification is protection against ignorance," and ETFs are a great way for diversification, especially coupled with point 4.

2) Low Cost - these are low cost funds (usually fees of less than 0.5% per annum, excluding standard brokerage fees). Low costs plays a huge role to long-term investment returns. As John C. Bogle, founder of Vanguard funds always say, the key to investment is to buy the market via a low-cost fund!

3) Easy, Simple & Lazy - Skip choosing individual stocks, especially if you are not that well-versed in certain sectors or industries. You can also avoid spending previous time reading up on a company only to end up not investing in the company.

4) Capture upside of a Sector/Industry with Lower Risk - If you think that Technology stocks are going to do well, instead of buying individual stocks like Microsoft or Google, why not buy a Tech ETF that owns them both and many other companies. You may not get the full upside but at least you will not face the full downside!

5) Low Initial Capital Required - If you are just starting out with little capital for investment, you might not be able to diversify your investments properly or cost-efficiently! Eg; you have $200 to invest monthly. The money would probably allow you to at max invest in 2 companies ($100 each) excluding brokerage fees (2 times because it is 2 transactions).
If you invest in S&P 500 ETF however, you are immediately offered diversification to the 500 largest US companies & at a lower cost (maybe 0.5% annual fees + 1 time brokerage fee).


Instead of timing the market (which many people, including me, cannot do well), try to think of investment as a savings plan and set aside a monthly sum for investment into a ETF (preferably index ETF like S&P500). It can go a long way to building up your retirement egg nest, especially if you start young.
As John C. Bogle says, buy the market, buy low-cost, invest for the long-term and HANG TIGHT!

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7 comments:

  1. Hi,

    Isn't point 4 kind of contradict the purpose of etf investing? If u can't get the timing right, how do you get the timing of different sectors right?

    Isn't point 1 contradicting point 4? Low level diversification, like buying different companies of the same industry, isn't as good as diversification by buying all the companies in the market. I think one should only buy etf of the entire market, never those exotic ones like short etf, sector etf, leveraged etf etc etc

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    Replies
    1. Hi Papillion,

      Thank you for your comment! :)

      Thank you for pointing out the contradicting point above.
      I guess I did not go more into details about my points above.

      You cannot get the timing right - and that is the view of most investors like Buffett and Bogle.
      But that does not stop Buffett from investing into US property-related & financial industries.
      While you cannot time, you can choose sectors that you think will perform above average over the long-term, and you can invest in them via ETFs. So that's point 4.

      Point 4's meaning of diversification is diversifying away individual stock risk.
      Point 1's meaning of diversification is diversifying away sector-related risk.
      So I guess it really depends on the type of strategy used and how ETFs can help, whether is it via index investing or rotational sector investing (which is pretty hot recently)

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    2. Hi Cheez,

      No problem :)

      I think it's possible to get the timing right. Not exactly right, but roughly. The greats use their own valuation to invest in sectors that are undervalued, so that's their form of timing. However, I think if you think that individual stocks selection is not your cup of tea, then you shouldn't do sector investing too. Buying the entire market will be the right action for passive investors. So I must disagree with investing ANY kinds of etf that are not those broad market types one. The more exotic these are, the more one should avoid.

      I think pt 4 concentrates sectorial risk and pt 1 diversifies company risks, but both do not remove market (systemic) risk!

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  2. I think it would be a waste not to discuss ETFs in tandem with index investing, and of course ETF investing is not quite the same as index investing.

    ETFs are simply tools in which one could use to achieve index investing. The very first ETFs were created with the intention of being used with index investing. Along the way, trust the creative (and greedy) folks to come up with exotic variations. Now we can "gamble" on technology sector outperforming, or emerging markets booming, not exactly what Bogle would encourage.

    Keep the posts coming! Would love to read more views on ETFs.

    ReplyDelete
    Replies
    1. Hi Turtle Investor,

      Thank you for your comment! :)

      Glad that you like this article about ETF.
      Am working on another article about ETF investing - both passive & active strategy!
      I believe if people know what they are doing, active management is good.
      If people have no idea what they are doing, passive index investing is good! :D

      Stay Tune! :D

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  3. Hi, is it possible to short sell etf? Thanks.

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    Replies
    1. Hi,

      Yes it is possible to short an ETF via an inverse ETF (usually tracking an index).
      http://www.simple-stock-trading.com/short-ETF.html shows a list of inverse index ETFs (makes money when the index falls).

      You can also short an ETF outright via your broker

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