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Understanding Exchange Traded Funds
Investing and Trading in Exchange Traded Funds
• What are exchange traded funds (ETFs)?
Exchange Traded Funds or ETFs, are open-ended index tracking funds or trusts that are listed and traded real time on exchanges like SGX. An ETF is a security that tracks an index, a commodity or a basket of assets like an open-ended investment fund, but trades on an exchange like a stock. Since ETFs are bought and sold on an exchange like shares, ETFs are priced and traded throughout the day, and are not restricted to once-a-day trading at the end of the day. Essentially, ETFs combine the characteristics of an open-end fund and a stock.
• What are the benefits of ETFs trading as stocks?
- Can buy and sell at market prices during trading hours;
- No upfront sales charge, although brokerage commission apply ; and
- Can apply stock trading techniques, such as stop-loss orders, limit orders, margin purchases and short sales.
• What indices do ETFs track?
ETFs track the performance of a variety of broad based and narrow stock, bond, and commodity indices.
• Why invest in an index?
Indexing, often called "passive management," involves investing in a group of securities that represent the composition of a broad stock market, stock industry sector, international stock, or bond index. Index funds offer "market level" performance; they aim to generally match the performance of a specific index. Index funds generally have lower management fees and operating expenses than actively managed funds.
• How liquid are ETFs?
ETFs offer two different sources of liquidity. Firstly, traditional liquidity as measured by secondary market trading volume. Secondly, the liquidity provided by the creation and redemption process to match investor demand, enabling both large and small orders to be “filled” intraday. Therefore, it is possible for ETFs with low trading volume to still be liquid. In addition, market makers are available in the SGX’s ETF market to provide continuous bid-ask quotes to ensure liquidity.
• How does the performance of an ETF compare with its underlying index?
ETFs are designed to provide investment results that generally correspond to their underlying benchmark index by holding a portfolio of securities designed to give similar price and yield performance. Of course, because of the forces of supply and demand and other market factors, there may be times when shares of an ETF trade at a premium or discount to its underlying portfolio value.
• Is the value of an ETF equivalent to the value of its underlying index?
Not necessarily. The share price of many ETFs is initially set at a percentage of the index upon which they are based, but may differ over time due to costs and other factors.
• What is Net Asset Value (NAV)?
The dollar value of a single fund share, based on the value of the underlying assets of the fund minus its liabilities, divided by the number of shares outstanding.
• What is the difference between the market price and NAV of an ETF?
NAV refers to a fund’s total assets minus its liabilities, whereas market price refers to the quoted price that an ETF is trading at on an exchange. At times, the NAV and market price of ETFs will diverge.
• Where do ETFs initially come from?
ETFs are "created" by large investors and institutions in block-sized units of shares (or multiples thereof) known as "Creation Units" of a respective ETF. The creation process occurs when the Fund Manager creates and issues ETF units to the Participating Dealer in exchange for securities. These securities form the portfolio of the fund. Similarly, block-sized units of ETF shares can be redeemed in return for a portfolio of securities. The redemption process occurs when the Participating Dealer redeems ETF units in exchange for securities from the Fund Manager. The Fund Manager will then cancel these ETF units.
• What are the risks on investing in ETFs?
- Market risk: The day-to-day potential for an investor to experience losses from fluctuations in securities prices;
- Tracking error risk: The risk that the Fund Manager of the ETF is unable to exactly replicate the performance of the underlying;
- Foreign exchange risk: The risk of an investment's value changing due to changes in currency exchange rates; and
- Interest rate risk: The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between two rates, in the shape of the yield curve or in any other interest rate relationship.
• How can I start trading in ETFs ?
Investors will need two accounts: a trading account with a stockbroking member of SGX and a securities account with The Central Depository Pte Ltd (CDP). Thereafter, you may buy or sell ETFs through your broker or through your online trading account. If you already have a trading and securities account, you do not need to open a separate trading and securities account to trade ETFs. ETFs are traded during the normal trading hours of SGX, which is from 9am to 12.30pm and 2pm to 5pm. A list of SGX-registered brokers is available here.
• Can I purchase and redeem ETF units through the Fund Manager?
Retail investors cannot purchase or redeem ETF units through the Fund Manager like they do for normal mutual funds and unit trusts. Instead retail investors go through the Participating Dealer. For ETFs, there is a minimum creation and redemption size stipulated in the prospectus. For transactions less than the minimum creation and redemption size, retail investors can simply place orders through their brokerage accounts for execution on the SGX-ST.
• Which of the ETFs listed on SGX can be purchased using CPF funds?
Currently, StreetTRACKS® STI ETF and SPDR® GOLD SHARES are CPF approved investment.
• How easily can I buy or sell ETFs?
ETFs are listed on an exchange and can be traded intraday, making it easy for investors to buy or sell ETFs.
• What is the minimum investment amount?
ETFs are traded in board lots. Please refer to individual ETF prospectus or click here for the minimum lot size.
• Can ETFs be sold short?
Yes. All ETFs may be sold short, representing the sale of "borrowed" shares in anticipation of lower prices. Investors are required to make arrangements to borrow securities before selling short. If investors cannot settle by the settlement date, he/she will be bought in.
• What transaction fees do I need to pay to buy and sell ETFs?
- Prevailing brokerage commissions;
- Clearing fees of 0.04% of the contract value (subject to a maximum of SGD600); and
- Goods and services tax at prevailing rate on brokerage commissions and clearing fees.
• Is there a sales charge on ETFs?
While ETFs funds are not subject to sales charges, usual brokerage commissions for securities purchases and sales will apply.
• Do I get paid dividends on ETFs?
ETF holders are eligible to receive their pro rata share of dividends, if any, accumulated on the stocks held in an ETF, and interest on the bonds held in an ETF, less fees and expenses. There may also be the opportunity for dividend reinvestment. You are advised to look into the distribution policy as specified in the prospectus.
• Which of the ETF listed on SGX yield dividends?
Currently, all the SGX-listed equity based index ETFs yield dividends (if any is declared). The ABF Singapore Bond Index Fund and StreetTRACKS® Gold Shares do not yield dividends.
• Do ETFs come with a prospectus and where can I get a prospectus?
Yes, ETFs come with a prospectus and it is important that investors read a prospectus for all ETFs in which they are interested. A prospectus contains more complete information, including charges, expenses and potential risks. Read the prospectus carefully before investing. They can be obtained by clicking here.
• Where can I get up-to-date price information?
The pricing of ETFs is continuous on the Singapore Exchange during normal trading hours. Click here to get live prices of ETFs. Investors can also obtain this information from their brokers and stock quotation systems. The closing prices are also published in major newspapers on the following Singapore business day.
• How are transactions in ETFs settled?
Transactions in ETFs are settled in the same manner as transactions for stocks, which adhere to a T+3 settlement cycle.
• Are there any Singapore dollar denominated ETFs?
Yes. ABF Singapore Bond Index Fund, Lyxor ETF India (S&P CNX Nifty) and StreetTRACKS® STI ETF are Singapore dollar denominated.
• What should I do before investing in an ETF?
You should be aware of the following:
- The investment objective and strategy of the ETF;
- The information about the index that the ETF is tracking;
- The ETF's dividend policy;
- The fees and charges that will be borne by you as an investor;
- The channels through which trading information of the ETF will be disclosed; and
- The information about the management company.
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