Tuesday, May 11, 2010

Exchange Traded Funds (ETF)

There are two types of exchange traded fund (ETF).

a) An ETF that is invested in the shares that track the index
b) An ETF that is composed largely of deriviatives and have leverage.

You should invest in type (a), such as the STI ETF managed by StateStreet in SGX. This type of ETF is held by a trustee under the trust law.

You should avoid type (b), as it carries the risk that the issuer of this product may get insolvent, as has happend with Lehman Brothers.

Do not worry about the liquidity of the STI ETF. It is sufficient for ordinary investors, who wish to invest small sums of money for the long term and to withdraw small sums every one or two months for their expenditure. Liquidity is not an issue.

The STI ETF is NOT suitable for speculators who need the liquidity for trading. If you wish to trade, it is better to get a liquid stock.

If you are not sure about the structure of the ETF (i.e whether type a or b), you should ask the stockbroker or just stick to STI ETF (managed by State Street).

Tan Kin Lian

4 comments:

Hiei said...

Mr Tan, if you want something that track the index, isn't the index futures better in terms of costs? Like the Dow and/or S&P futures, or MSCI SG futures? There is some kind of leverage, but you should be fine as long as you hold sufficient funds to maintain your position i.e, be prepared to have the amount for the full or at least 50% of the contract size if you intend to hold for long term purposes.

symmetrix said...

Just to add to Mr TKL's comments.

One can also consider investing in DBS STI ETF, which is managed by DBS. This tracks the same 30 stocks as the STI ETF does. It may be purchased in smaller lot sizes of 100 shares (instead of the usual 1000 shares). However such small lots will incur a relatively higher mgmt fee.

One might consider splitting one's investment into both these ETFs as a form of diversification. Go for the long haul, as I feel the STI index (and consequently the value of these two ETFs) will appreciate.

H said...

Hi Mr Tan,

I now realised there are two types of ETF.

Can i ask which category is SPDR Gold ETF under?

Tan Kin Lian said...

Hi H
Can you ask SGX or your broker or do some research on it?
I have invested in the SPDR Gold. I think that it is a cash-based ETF as it does not have any derivative - but I can be wrong.

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