A newbie's guide to ETFs and their risks

Exchange-traded funds (ETFs) have been a game changer for all types of investors, from first-time retail players looking for low-cost options to experienced traders using more complex strategies.

- Angela Tan

Retail investment in Singapore Exchange-listed ETFs soared from $1.3 billion in December 2019 to $3.5 billion in September 2024, a jump of around 170 percent, the bourse said.

The Sunday Times asked Mr Dennis Quah, head of Singapore wealth at BlackRock, the world's leading provider of ETFs, what investors need to know before putting their money in these products.

WHAT ARE ETFS?

"ETFs are similar to many other funds in that they are a basket of investments, often stocks or bonds, that an investor can buy and sell," notes Mr Quah.

"What makes an ETF unique is that the basket of investments is bought and sold on a stock exchange, just like an individual stock. This means that with just one investment, an investor can buy a diverse range of assets, almost instantly."

Many ETFs are designed to track the performance of specific market indexes, such as the FTSE or S&P 500, or selected industries like technology. They provide investors with a simple way to access the world's financial markets without having to buy individual stocks separately.

If you buy into an ETF that tracks an index like the S&P 500, which represents the 500 largest companies trading in the US, you are investing in a bit of every company in the index with a single trade, rather than having to buy shares in each firm individually.

WHY INVEST IN ETFS?

ETFs offer some unique advantages, Mr Quah says. These include:

● Diversification: ETFs make it easy to invest broadly across multiple companies or assets, diversifying your investment and helping to mitigate risk.

● Low cost: The total cost associated with managing ETFs is typically less than that for actively managed mutual funds, so you can invest more of your hard-earned money.