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Exchange traded funds (ETFs)

BullionStar

If you are a busy professional who have no time for stock research but would like to build a diversified investment portfolio with global exposure, then exchange traded funds (ETFs) may be for you.

Generally, there is still a lack of awareness among retail investors on this class of investment probably because ETFs passively track indexes. Thus, it may take the thrill out of stock picking. Nonetheless, ETFs offer an alternative path to seek returns from the market.

Broadly speaking, ETFs is a type of collective investment scheme that pooled money from investors and invested according to the fund’s objective. In a way, it is similar to unit trust. However, the main difference between unit trust and exchange traded fund is that the former is actively managed by professionals while the latter passively track a specified index. Because of this, ETFs are open-ended investment funds and are traded on a stock exchange.

The interesting thing about ETF is that it replicates an index and do not try to outperform the underlying index.Take for example, if an ETF tracks the Straits Times Index (STI) which declines in value, the ETF would produce a return that reflects the drop in value.

Stock investing

There are several advantages in investing in exchange traded funds. Firstly, if you have limited capital but would like access to blue chips, then ETFs offer a low cost and simple way for you to own index stocks. For example Nikko AM Singapore STI ETF offers investors an opportunity to invest in the top 30 companies listed to SGX.

Secondly, retail investors do not need to spend their precious time doing research because ETFs will passively track the performance of the index. If the index increases, you make money. Conversely if the index plunged, you incurred paper losses. Very simple and straightforward.

Besides market indices, there are ETFs that track commodities such as gold. SPDR Gold Shares is the first gold-backed exchange-traded fund to be listed in Asia. The Gold Shares are backed by physical allocated gold bullion and denominated in US dollars. SPDR Gold Shares aims to offer investors an opportunity to participate in the gold market through an investment in shares. The
investment objective is for the shares to reflect the performance of the price of gold bullion, less the ETF’s expenses.

Note that SPDR Gold Shares are traded in USD dollars and in board lot size of 10 shares. So investors must factor in the foreign exchange rate and the applicable fees as well. An interesting trend of SPDR Gold Shares is the Net Asset Value (NAV) Performance for the past decade. The net asset value is the total value of all underlying assets of the fund minus its liabilities in the fund. Assets are held by a custodian and/or trustee.

For the past 1 year, the annualized NAV increased by 1%. The performance dropped to negative 7% if measured for the past 5 years. This is because gold spot price has decreased from the peak in 2012. However, the performance increased to 8.44% if measured since inception in 2004. What this data means is that if you hold this gold ETF for the long term, the value of your investment will increase by 8% annually.

An increase of 8% compounded over 13 years is a frightening amount. For the record, gold price has risen from USD 320 per ounce in 2004 to USD 1270 per ounce in 2017. There is almost 400% increase. To be frank I don’t know any other asset that can produce this sort of returns but gold ETF is definitely worth considering provided that you are able to hold this asset for the long term.

One thing that needs to be highlighted is that buying gold ETFs is not the same as buying real physical gold. You only own units or shares of the ETFs but you are not entitled to the actual gold. This means that as an investor, you cannot convert the shares or units into real gold even though the fund is backed by real gold.

       Gold and Silver Bullion

There are wealth builders who prefer to own physical bullion to shares or ETFs. Previously, I have written several articles on my gold strategies and Singapore gold market. Check out the following articles:

  1. Singapore gold bullion market
  2. Divested my physical gold
  3. Buy gold now?

SPDR Gold Shares is also one of the 4 ETFs available under CPF-OA. Investors can also place up to 10% of investible Ordinary Account money in SPDR® Gold Shares ETF.

My strategy

My strategy is to build a diversified portfolio with a core-satellite investment approach. This means that I will purchase exchange traded funds while stock-pick some “elite” stocks for additional out-performance. In doing so, my risks will be diversified without compromising too much on my expected returns.

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Magically yours,

SG Wealth Builder

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Updated: May 15, 2017 — 11:21 pm

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