If you have ever invested in the stock market, you will realise that the process of picking the right stock for your portfolio can be extremely confusing. Out of the tens of thousands of stocks listed throughout stock exchanges, how do we go about selecting the right ones for us?
On top of that, just keeping up with financial news can be overwhelming. It is almost impossible to keep up with the 24-hours news cycle. More importantly, how can we differentiate between the important information and the noise within the news,
That might be the reason why after two centuries since the creation of the stock markets, most of us are still struggling in our investment. However, in 1975, a fund manager named Jack Bogle saw the need to simplify the investment process. He created the first passive index fund in the market. Bogle saw that instead of implementing complicated investment strategies and trying to outperform the stock market, maybe it is easier and more effective to simply track the stock indices. By investing passively, it means that the fund would just be investing in companies within the relevant stock indices.
Father of Index Funds, Jack Bogle
Thus, in 1975, he founded Vanguard and created the S&P 500 passive index fund. The fund invested in all the 500 companies within the S&P 500 Index according to their weightage in the index. More impressively, over the past 40 years, index funds have shown investors that this simple strategy actually works. His Vanguard 500 Index Fund has returned close to 11% a year for investors since its inception and has now more than US$400 billion in assets.
Many of the Exchange Traded Funds (ETFs) are built on this wave of passive investing strategy. Many major index ETFs have also since produced reasonable returns for investors over the longer term. The main Singapore Straits Times Index ETF, the SPDR STI ETF (SGX:ES3) has returned investors close to 7% since its inception in 2002.
Through the creation of index funds and ETFs, investors now have a simple and more accessible method of investing.
So What Is An Exchange Traded Fund?
Exchange Traded Fund, or ETF, can be seen as a unit trust that is listed on the stock exchange. This means that instead of buying the ETF through a unit trust agency or a bank, we can invest directly in an ETF simply by buying it on the stock exchange, paying our usual brokerage and clearing fees only.
Thus, an Exchange Traded Fund will generally charge investors at a much lower rate compared to traditional unit trusts. However, fees are just one of the many advantages an ETF has.
Diversification At Your Fingertip
We all know that diversification is fundamental to the safety of our portfolio. Yet, most convention would point to having at least 30 stocks in our portfolio in order to achieve diversification.
If we are building our portfolio stock by stock, it would require a huge amount of time and effort to achieve that magical 30 stocks in our portfolio. For one, if we were to invest just $1,000 for each stock, we would need a capital of at least $30,000 to create a diversified portfolio.
However, investing in an ETF like the Straits Time Index ETF, that invest in 30 stocks within the Straits Time Index Constituents, would immediately help us create a diversified portfolio with just ONE stock! This means that we can have a diversified portfolio from as low as just a few hundred dollars.
On top of that, ETFs offer more than just access to a diversified stock portfolio. There are ETFs readily available in the market across all asset classes like stocks, bonds and even commodity markets like gold or oil.
3 Steps To Start Investing In ETFs
If ETFs sound like an investment instrument for you, you can start by selecting the one you are interested in. FSMOne.com provides a comprehensive ETFs selector for free. You can click here to start your selection.
Step One: Selection
The ETFs Selector allows you to screen for the markets and asset classes that you are interested in.
In this example, we chose to find out more about ETFs that focused on the Singapore equity market.
The results will show you the entire list of ETFs available for you to invest in with their relevant information.
Step Two: Research
Even though we are investing in a passive ETFs, we must still do some level of research before putting our investment at risk. After all, no investment is risk-free.
By clicking into the ETFs that you are interested in, FSMOne.com will present to you all the important information you need to know about the funds. Some of the key aspects to consider when choosing an ETF would be:
Size of the ETFs
As we are buying into a fund with extremely low fees, it might be safer to select funds with a sizeable asset under management. This is to ensure the fund has enough liquidity for us to buy and sell it when required. It is also a sign of strength as we want to ensure the fund has enough revenue to continue operating for the long term. If the fund size is too small, there is a risk that it might be closed down by its issuer at a later date.
Although most ETFs would have lower than average fees, it is important for us to know how much they are and what we are paying for.
Composition of ETFs
It is also important to look through the holdings within the funds so that you will have a better sense of what you are actually investing in. If you have other ethical or religious requirements you want to implement in your investment selection, a study into the composition of the ETFs is even more critical.
Step Three: Have A Brokerage
Lastly, you would need a reliable brokerage that would help you in executing and storing the ETFs. FSMOne.com offers great access to ETFs listed in Hong Kong, the US and Singapore. It is also one of the lowest cost brokerages available in Singapore. FSMOne.com also provides a free, fast, fully online, one-day account opening process now. You can click here to find out more.
If you want to gain tips and further insight into building your portfolio and investing with ETFs Exchange Traded Funds, then you should definitely register (It’s FREE) for the FSM ETFestival held on the 4th of May 2019 at Capitol Theatre. Click here to find out more.