What are exchange traded funds?
Exchange traded funds (ETFs) are singular securities that track the performance of their usually-stated underlying product. For instance, one of the most popular ETFs in the world this year, the ‘iShares Core MSCI Emerging Markets ETF’ (Ticker: IEMG), tracks the performance of over 2,000 stocks across several emerging markets like China and Taiwan.
Other examples of popular ETFs include the ‘Nikko AM Singapore STI ETF’ tracking the Straits Times Index (STI), the ‘SPDR S&P 500 ETF’ tracking the S&P 500, and the ‘Vanguard Growth ETF’ tracking a selection of growth stocks.
Taking a closer look: The ‘iShares Core MSCI Emerging Markets ETF’ (IEMG)
Ticker: IEMG US
Core objective: Investment into large-cap stocks in Emerging Markets globally
Price: $63.21 (as of July 30)
From Table 1 (Top 10 Constituents of IEMG, out of 2,562 total), one can see that investing in the IEMG would likely give an investor outsize exposure to Chinese-centred and technology-related stocks.
While ETFs may track hundreds or even thousands of underlying securities such as stocks or bonds, they are traded as marketable securities, allowing it to have just one price, making it easy to buy and sell. ETFs are also traded on exchanges, hence the name ‘exchange-traded fund’.
Type of ETFs
• ETFs categorised by their underlying themes
The most popular ETFs right now tend to be stock ETFs with a themed focus (such as the ‘ARK Innovation ETF’ that tracks innovative or disruptive technologies), although there are ETFs that track bonds, commodities, currencies, and indices as well.
• Active vs Passive ETFs
ETFs are also however split by passive and active ETFs. Passive ETFs tend to be those that aim to mirror the performance of the underlying index or security, without making active investment decisions. Active ETFs on the other hand, typically have a stated investment objective, such as the well-known ‘ARKK Innovation ETF’, which aims to select the most promising growth stocks based on their innovative and disruptive potential.
To investors, however, the most important distinguishing factor here may be that actively managed ETFs tend to incur more fees than passively managed ETFs, although the popularity of active ETFs is on the rise, after a series of stellar, high-profile performances by active managers in 2020.
Why ETFs?
The flow of money into ETFs have been described this year as a literal stampede. This year has already seen the ETF industry smash the previous record for inflows set in 2020, in just seven months, attracting over $497 billion in fund flows. The full-year forecast as a whole looks on track to break past $600 billion, largely thanks to the best first half of inflows ever recorded.
Some of the key structural reasons for the new-found popularity of ETFs include:
• More cost-effective than mutual funds
• More liquid than mutual funds
• Tracks multiple (numbered in the hundreds or even thousands) underlying assets, allowing both small and large investors to gain a diversified, themed portfolio with just one purchase. For example, buying the ‘Invesco QQQ Trust Series 1 ETF’ allows inves- tors to gain exposure to a range of major technology stocks across several different industries, as it tracks the performance of around 100 NASDAQ-listed stocks.
How do I use ETFs as part of an investing strategy?
Opening a position in an ETF takes some of the hassle out of making several independent investment de- cisions. Many ETFs run on themes and specifically stated investment objectives. Thus, for investors with investment objectives such as wishing to gain exposure to specific industries or geographies, investing in an ETF is a quick, easy and often cost-efficient way to gain do so.
For example, an investor seeking to speculate on the movement of the US technology sector may think of using the movement of the NASDAQ-100 as a proxy for US technology stocks in general.
However, where opening a position in the NASDAQ-100 itself is not possible (since it is not tradeable), an investor can instead utilise the ‘Invesco QQQ ETF’ where the ETF has the stated objective to replicate the movements of the NASDAQ-100 by mimicking the structure of the index as closely as possible.
As can be seen from Table 2 listed below, the performance of the ‘Invesco QQQ ETF’ (tradeable) is almost entirely a mirror of the NASDAQ-100 index (non-tradable), making it a suitable exchange-tradable security for the average investor to open positions in.
Opening a position based on your view of the market
Now that you know a bit more about what ETFs are and their advantages, a simple way of dipping your feet into them is to think about investing based on themes. On that, Phillip Futures is well-positioned to help you access the market through our Contract-for-Differences, which gives you the flexibility to take long or short positions on the underlying asset, instead of the usual long-only strategy should you buy the ETF yourself normally.
For instance, if you feel that growth or technology stocks are overvalued based on your research, you may seek to open a position in the well- known ‘Invesco QQQ’ that will give you exposure to the NASDAQ’s price movements.
Take a look below at Table 3 for some other popular ETFs that Phillip Futures offers, as well as theirthemes.
Mooris Tjioe is an investment analyst with Phillip Futures
Cover image: Microsoft
