Discussing ETFs
Exchange Traded Funds (or ETFs in short) have become popular as a investing tool for both institutional and retail investors alike.
As a low cost efficient means to achieve diversification in liquid markets, it is no surprise for this exchange listed instrument to gain popularity over time.
Many like ETFs as they associate it with simplicity in trade execution (buy/sell like ordinary stock on exchange), low cost advantage and diversified regional/industry sector exposure in one neat package. Not to mention there are numerous choices available (locally and overseas, especially in US). Besides passive managed common index tracking funds, there are new flavours coming onto the market every now and then e.g. inverse ETFs, long-short ETFs, currency ETFs and those covering proprietary/niche industry indices. One can refer to an article "Not all ETFs are created equal" to get an idea of how ETFs are made different.
Hence, for the retail ETF investor, do bear in mind the following considerations (worth repeating):
- tracking error of the fund (not all ETFs track closely the underlying index)
- replication method & counterparty risk (strength of counterparty, quality/liquidity of swap collateral)
- performance of market maker
Beyond the debate on passive vs active fund management, there will always be gems and stones (as well as bad apples) in both the realm of mutual funds/unit trusts and ETFs.
The secret to investing success may not always depend on the instrument. Asset allocation, over time, probably plays a more significant role in the entire operation.
