Exchange-traded funds (ETFs) are ideal for many Singaporean investors. While it’s easy to be tempted by the promises of high returns, ETF trading also comes with its fair share of risks. Understanding these risks and advantages is essential for any investor who wishes to partake in the trading of ETFs.
Investing in exchange-traded funds (ETFs) provides Singaporean investors with the opportunity to become involved in markets that they may not have been able to access or understand previously. However, as with any investment opportunity worth its salt, there will always be both pros and cons to consider. Here are those benefits and drawbacks:
Diversity
One key advantage is the diversity offered by the different types of ETFs available. Although known primarily as a low-cost, high yield investment vehicle that provides access to the equity market, there are also options for bonds and real estate. This ensures Singaporean investors have more than one option for diversifying their portfolios.
Transparency
Another benefit of trading ETFs in Singapore is transparency. As most products designed for retail investors track an underlying index, you’re provided with easy access to information about how it’s performing without the need to do extensive research on its components yourself. This makes them cheap and efficient investments that can provide returns that reflect those of their surrounding markets or industry sectors.
Low management fees
Because management fees tend to be lower in this type of product than in mutual funds, ETFs are also often considered efficient investments. However, it’s important to note that you’ll need to factor in the total costs involved when using these investment vehicles, including brokerage fees and commissions that vary between providers.
Risk
Since there’s no guarantee of success with any investment, trading ETFs can also come with associated risks. If stock prices go down, your ETF will also lose value; it may even differ from the underlying assets’ performance or index if it were designed differently. You may need to pay another fee for selling the product later, all of which affects the profitability of this investment opportunity. All things considered, though, most products meant for retail investors are generally low risk, and it’s essential to consider all sides of the story before deciding whether trading ETFs is suitable for you.
Tax
As with most investments, there is also the possibility that you will have to pay taxes on your profits later, which can affect your overall return. Any gains made from buying and selling non-qualified products in Singapore may be taxed, but this doesn’t apply to exchange-traded funds (ETFs). If you pay less than $200 per year in capital gains, though, no tax is imposed; if you earn more than that amount, then do note that only half of any profits made will be discounted.
This is one of many ways ETFs can provide investors with an excellent opportunity since they’re not generally taxed separately from the returns they generate. This is because their value tracks the underlying assets, and it’s necessary to sell them before accessing those gains anyway.
Lack of control
However, it’s important to remember that although you have a lot of information about your ETFs, you don’t have as much control over them as you would with other investment vehicles such as mutual funds, for example. The number of units available can change daily because prices adjust accordingly, and this means there may be times when market activity causes adjustments in these numbers. Therefore, you’ll need to think about how your investment plans might be affected by fluctuations in liquidity, which could affect the level of market exposure you’re able to take on at any given time.
Summary
Many benefits are associated with trading ETFs in Singapore, including diversity, transparency and low management fees. The risks involved are also well documented, but if you’re aware of what to look for and manage your investments accordingly, ETFs should be an excellent addition to any portfolio. New investors should use a reputable and experienced online broker from Saxo Bank; check here for more information.
