Exchange Traded Funds ("ETF"s) have slowly but surely gained footing among investors. For those who seek additional information on ETFs before investing, read on to find out how your investment portfolio can be diversified further with ETFs.

What is an ETF?

ETFs are open ended investment funds that are traded directly on the stock exchange. The objective of an ETF is to track the performance of an underlying index or even to replicate the performance of a composition of different stocks.

Benefits of ETFs

As ETFs mimic the composition of a stock index, you gain exposure to a variety of securities without having to invest time and money into individual stocks.

ETFs are traded directly on the exchange and passively managed, hence there is a zero sales charge and management fees are lower compared to actively managed funds like Unit Trusts.

The purchase and sale of ETFs between buyers and sellers is ongoing throughout a working day on the stock exchange, making it easy for you to liquidate your investments.

Reduced Volatility
Due to their broad equities exposure, ETFs are more resilient and can provide a buffer against extreme fluctuation or erosion of investment value, in the face of market volatility.

ETF Risks

Types of Risks
Market risk The stocks held in an ETF are affected by market factors and will fluctuate in tandem with the movement of the underlying index.
Trading risk As ETFs are traded on the stock exchange, regular trading will increase transaction costs and the risks of trying to time the market.
Currency risk ETFs traded in a foreign currency are subject to currency risk, as the exchange rate may depreciate against the local currency.

Comparing ETFs to Unit Trusts

Although they are both managed funds, as an investor you should be aware that ETFs and Unit Trusts are fundamentally different, thereby making them suitable to be held together in a diversified investment portfolio.

Exchange Traded Fund
Unit Trust Fund
It is a passive tracker fund that tracks the movement of a particular index. It is an actively managed fund by a professional fund manager.
Investment objective is to track the market index. Investment objective is to outperform the market.
Traded on the stock exchange during trading hours at the prevailing price, which will fluctuate according to market conditions. Net Asset Value (NAV) is calculated once a day, at the end of the day, based on the value of the underlying assets.