Investing in ETFs instead of individual stocks

Investing in ETFs instead of individual stocks


Q: I have heard about Exchange Traded Funds (ETFs) that track the Straits Times Index and some investment books claim that this type of funds are an easy way to invest in the stock market. What is your advice?


A: ETFs, like shares, can be bought and sold at an open market price through the exchange on any trading day. They attempt to replicate the performance of a stock market index or performance of a certain sector.

The main difference between a share and an ETF is that shares represent holdings of a single entity, whereas an ETF is a group of stocks that has been pooled together to form an investment fund. One such example is iShares MSCI Singapore, an ETF that tracks the Straits Times Index's (STI's) performance. ETFs offer a passive and an alternative investment into the underlying securities, which would otherwise require a large capital outlay if held individually.

Other benefits of ETF investing include the ability to access markets that are restricted to foreign investors, for instance the Taiwanese market.

The same can be said of the SPDR Gold ETF. Rather than buying physical pieces of gold or trading in gold futures, the ETF is an easily accessible investment vehicle for retail investors to buy into the performance of the precious metal.

Although ETFs may be attractive as investments because of their low costs, tax efficiency and stock-like features, they may suffer from illiquidity and low trading volumes.

Further, the performance of ETFs may not completely track that of the underlying securities.

Lastly, we need to be mindful that not all sectors of an economy perform in tandem. Investors who wish to seek above-market returns may see value in individual stock selections, or unit trusts where the fund manager exercises discretion in picking good potential stocks that may outperform the benchmark.

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