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Exchange traded funds ETFs are open-ended investment funds listed and traded on a stock exchange. An ETF typically aims to produce a return that tracks or replicates a specific index such as a stock or commodity index. Hence, index tracking ETFs have fees and charges that are usually lower than those of actively managed simple explanation of exchange traded funds funds. ETFs may have complex structures. Do check with your financial institution whether the product you are considering is an SIP.
For information on simple explanation of exchange traded funds requirements in place when transacting SIPs, please refer to the consumer guide. What is the return? There is capital gain when the price of the units rises above the price paid for them. Some ETFs also pay dividends. Why do people invest in ETFs?
There are many ETFs to choose from. If you buy an ETF which tracks a share index, you gain exposure to the performance of the index.
You can gain this exposure simple explanation of exchange traded funds having to spend more money buying the component stocks of the index. In addition, fees and charges for ETFs tend to be lower than for actively managed investment funds as ETFs have lower management fees. There is also usually no sales charge, although any transactions in ETFs on the SGX would still be subject to brokerage commissions or transfer taxes associated with the trading and settlement through the SGX.
ETFs are not principal-guaranteed. You may lose all or a substantial amount of the money you invested in certain situations. The risks of investing in ETFs are described in the prospectus and product highlights sheet. You are exposed to foreign exchange risk when you buy an ETF whose currency is different from your own. What types of ETFs are available? ETFs typically aim to produce returns that track or replicate the performance an index. How are ETFs structured and what do they invest in?
There are different ways to structure an ETF even if its simple explanation of exchange traded funds objective is to track the same underlying index. Synthetic ETF Synthetic ETFs are ETFs that use derivative products such as swaps or access products for example, participatory notes to produce returns which track the relevant indices.
The use of derivatives means:. Swap-based simple explanation of exchange traded funds structure In an unfunded structure, the ETF buys and holds a basket of securities. The basket of securities may be completely unrelated to the index the ETF is tracking.
The ETF then enters into a swap agreement with another entity known as the swap counterparty. The ETF holds and retains control of the basket of securities even if the counterparty defaults. Additional losses may still be possible, for example, if the basket of securities is liquidated under adverse market conditions. In exchange, the swap counterparty pays the returns of the index the ETF is tracking.
The swap counterparty will post collateral with a third party custodian. The securities making up the collateral may be unrelated to the index the ETF is tracking. In the event that the counterparty defaults on its obligations under the swap, the funded ETF will suffer a direct loss of the difference between the index value and the value of the collateral.
The funded ETF could suffer additional losses if the collateral is liquidated under adverse market conditions.
Access product-based In an access product-based ETF, the Simple explanation of exchange traded funds invests in participatory notes P-notes or other derivative products that replicate the performance of the index. This structure has been used for indices on restricted simple explanation of exchange traded funds such as China or India. For simple explanation of exchange traded funds, participatory notes linked to a basket of Chinese A-shares may be purchased and held by the ETF.
As such, the ETF would be exposed to the counterparty risk of the participatory notes issuer. Risks specific to swap-based structures. What fees and charges are there? Find out about transaction charges like brokerage charges and clearing fees from your financial adviser or broker. There are usually no sales charges for ETFs. However, certain charges are payable by all ETFs.
These include fees that the fund manager, trustee and other parties charge to the ETF. Although these fees are paid by the ETF and not by the investor, they will increase tracking error. ETFs differ in terms simple explanation of exchange traded funds complexity, investment objectives, strategies, risks and costs.
Simple explanation of exchange traded funds choosing an ETF, consider the following:. Are ETFs suitable for everyone? What to watch out for — what can cause me simple explanation of exchange traded funds lose money? What is an index?
A stock market index is a representative sample of the stock market and is expressed as a single value to measure the relative value of the stock market. Investing in ETFs may not be for everyone. They may not be suitable for you if you: Want potentially higher returns BUT are not prepared for variable returns which include the risk of losing all or a substantial part of your original investment amount; Do not understand how returns are determined or if you are unclear about the factors and scenarios that can affect returns; Do not understand the risks associated with the ETF.
Investors should be aware of the risks associated with the use of derivatives by ETFs, including the risk that the provider or counterparty of the derivative defaults. Are not prepared to leave your money invested for long periods of time. A longer time horizon is generally preferred to ride out short term price fluctuations. What is the maximum amount you can lose? Some of the risks associated with investing in ETFs whether cash or synthetic include: In cash-based ETFs, the manager may not be able to buy or sell the component stocks in their exact proportion, or adjust its underlying component stocks to keep up with market or weighting changes.
Execution costs, investment constraints, or timing differences may also add to tracking error. Foreign exchange risk You are exposed to foreign exchange risk when you buy an ETF whose currency is different from your own.
Some ETFs may trade in a currency that is different from that of the underlying assets. Liquidity risk Designated market makers provide liquidity in ETFs by providing continuous bid-ask prices throughout the trading day. But if the market maker fails to perform its duty due to insolvency, or extreme market conditions, liquidity of the ETF units in the secondary market may disappear, making it difficult for investors to sell their ETF units.
NAV is the net asset value of the fund, calculated at the end of each day while the indicative NAV is calculated periodically through the trading day. The indicative NAV will rise or fall correspondingly when the index value, which is based on the value simple explanation of exchange traded funds the index components, rises or falls.
Assets used in cash-based structures may be used for securities lending purposes. Investors are exposed to the risk that the borrower of the securities defaults and does not return the securities. Bonds ETFs can also track a specific bond index. Bond ETFs provide investors with exposure to bond indices. Commodities Commodity ETFs track the movement of commodity indices. The short index moves inversely to its corresponding long index on a daily basis.
Investors should note that the inverse index is designed to track the inverse position of the long index on a daily basis and may not be suitable for long-term investment. If you invest in an ETF tracking an inverse index for more than a day, the returns you get may be completely uncorrelated to the inverse performance of the relevant long index. The use of derivatives means: More parties are involved, e. You are exposed to the risk that the swap counterparty or access product issuer defaults on its payment obligations under the swap or access product.
Such a party may default if it becomes simple explanation of exchange traded funds or insolvent. Synthetic ETFs that are swap-based may use either the unfunded or funded structure. The ETF will pay out the return it earns from the basket of securities to the swap counterparty. Therefore, if the counterparty defaults, you could incur significant losses even if the underlying index is unaffected. Concentration risk This arises if the ETF is significantly exposed to a single swap counterparty or very few swap counterparties.
Conflict of interest This arises if the same financial institution or its related party takes on multiple roles as the manager, swap counterparty, index provider, and market maker of the ETF. If so, the possibility of conflict of interests arises.
Collateral risk If collateral is provided, there is a risk that the value of simple explanation of exchange traded funds collateral may decline after a default by the counterparty.
Also, the composition of the collateral held may have no bearing to the investment objective of the ETF. There may also be difficulties for the ETF to enforce its rights to the collateral. Concentration risk This arises if the ETF is significantly exposed to very few access product issuers. In some instances, the ETF may be exposed to only a single issuer. Tracking error This may be greater for access products because the structure has potentially greater inefficiency.
For example, access product commissions and maintenance charges may be levied on the ETF for each purchase or sale of the access products. Access products have limited duration Access products such as P-notes are of limited duration and may be settled automatically after a certain number of years after their issue. The ETF may be unable to renew the term of the P-notes it holds. Conditions governing foreign access to restricted markets may change The access product issuer may lose access to the underlying shares or to additional shares.
If additional shares cannot be obtained, the ETF cannot create more units. This may affect the price of units relative to the NAV. Collateral risk If collateral is provided, there is a risk that the value of simple explanation of exchange traded funds collateral may decline after a default.