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Stock Watch

Wednesday, November 26, 2008

Investing in Exchange Traded Fund - ETF

With major indices and commodities falling to one of the all-time lows, it will be a good time to take a look at investing in one of the derivatives - the Exchange Traded Fund or in short, the ETF.

Many people will panic during a market downturn, and do not know which stock will be the next to be hit, but most of these people also like to make good use of this downturn to buy stocks at a bargain price. A good alternative will be to look at ETF.

What is ETF?

  1. It is a investment fund listed on a stock exchange.
  2. It tracks the performance of an index, commodity or bonds.
  3. It functions the same way as a normal stock, and can be bought or sold via your broker like a stock.

In short, it inherits the PROS of both stock and unit trust.

Benefits

  1. Diversification - It allows a wide exposure via a single instrument, e.g buying the STI ETF allows exposure to the STI which comprises of 30 stocks.
  2. Exposure to inaccessible market - It allows exposure to say Taiwan and India markets via the Lyxor Taiwan and IS MSCI India ETFs, where normal investors normally have no means to buy a stock in these countries.
  3. Lower cost - Instead of upfront charges of 3-5% for unit trusts, ETF will only incur the usual brokerage commissions of approximately 0.5% and clearing fee of 0.04%.
  4. Transparency & Flexibility - ETF can be bought or sold like a stock during normal trading hours and its live prices can be easily accessible, unlike unit trusts where investors can only buy or sell at the end of the day.

Risks

  1. Market Risk - It falls and rise like a normal stock
  2. Foreign exchange - Most ETF are denominated in USD and thus a fall in US/SGD will result in a loss in exchange rates.
  3. Tracking Error - There is a slight risk that the ETF will not be able to replicate the underlying exactly, though this is not expected to happen.

Fair Value of ETF

The estimate of the fair price of an ETF will be its NAV (Net Asset Value) per unit. The NAV per unit is the total value of all assets minus liabilities in the fund, divided by the number of outstanding ETF units.

NAV is calculated once at the end of each trading day. An estimate of the NAV, called indicative NAV (iNAV) is also calculated periodically throughout the trading day. You can find the NAV value of those ETFs traded on SGX by going into the "General Announcements" of each ETF

I personally do not find these NAV of any significant to an investor's investment decision. Since you are buying into a portfolio of stocks, it should usually be for middle to long term investment, thus just buy when the underlying market is down. You will reap the returns when the market is up in a few years time.

SGX ETFs

NameUnderlyingListedLotBankCode
ABF S'pore Bond Index FundiBoxx ABF S'pore Bond Fund31 Aug 051000DBSABF SG Bond ETF
CIMB FTSE ASEAN 40FTSE/ ASEAN 40 Index21 Sep 06100CIMBCIMBFTASEAN40100US$
iShares MSCI India ETFMSCI India Index15 Jun 06100BarclaysIS MSCI India 100US$
Lyxor China EnterpriseHang Seng China Enterprise Index19 Oct 0610LyxorLyxor China H 10US$
Lyxor Commodities CRBReuters/ Jefferies CRB Index18 Jan 0710LyxorLyxor CMDTY 10US$
Lyxor Hong KongHang Seng Index1 Mar 0710Lyxor Lyxor HangSeng 10US$
Lyxor MSCI AC APAC ex JapanMSCI AC Asia Pacific ex Japan19 Oct 0610Lyxor Lyxor Asia 10US$
Lyxor MSCI KoreaMSCI Korea Index7 Dec 0610Lyxor Lyxor Korea 10US$
Lyxor MSCI TaiwanMSCI Taiwan Index1 Mar 0710Lyxor Lyxor Taiwan 10US$
Lyxor MSCI IndiaMSCI India Index5 Nov 0810LyxorLyxor MS India 10US$
Lyxor MSCI ThailandMSCI Thailand Index5 Nov 0810Lyxor Lyxor Thailand 10US$
Lyxor MSCI MalaysiaMSCI
Malaysia
Index
5 Nov 0810Lyxor Lyxor Malaysia 10US$
Lyxor India NiftyS&P CNX NIFTY index28 Mar 0810LyxorLyxor India Nifty 10
Lyxor MSCI Apex 50MSCI Asia APEX 50 Index5 Nov 0810LyxorLyxor APEX50 10US$
Lyxor ETF Commodities CRB Non EnergyReuters/Jefferies CRB Non-Energy index5 Nov 0810LyxorLyxor CRBNonEng 10 US$
streetTracks Gold SharesGold Spot Price11 Oct 0610State StreetGLD 10US$
streetTracks Straits Times Index FundStraits Times Index17 Apr 02100State StreetSTF ETF

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