Exchange-traded funds (ETFs) combine the features of a unit trust with those of a stock. ETFs are baskets of stocks that typically aim to track the performance of a stock market index. They can also be theme-driven, focusing on certain asset classes or commodities such as gold and agriculture.
This is how it works: By investing in the StreetTRACKS Straits Times Index (STI) Fund, for example, you gain exposure to all the 30 stocks, such as Singapore Press Holdings, SingTel and Singapore Airlines, that make up the STI.
The ETF invests in the STI component stocks in proportion to their respective index weights. This means investors can diversify their portfolios without having to buy each of the stocks directly.
Why is it important?
Investing in ETFs is an option for those who want to make their money work harder for them. This is because ETFs generally carry lower costs - zero sales charges and lower management fees - than unit trusts because they are passively managed.
In addition, ETFs trade like stocks on the bourse, so one can buy and sell them at market prices throughout the trading day. They provide exposure to a diverse variety of markets, and can offer greater diversification than shares.
To date, there are 24 ETFs listed here with more expected in the near future.
So you want to use the term. Just say...
Recently, I used my Central Provident Fund savings to buy shares in the StreetTRACKS Gold ETF as I wish to ride on gold's renaissance.
This article was first published in The Straits Times on November 09, 2008.
