WHAT ARE THE KEY FEATURES OF ETF?
Diversification through a single investment
When you buy an ETF, you gain exposure to a diversified portfolio of securities/assets through a single transaction. The extent of diversification benefits depends on the components that make up the fund portfolio.
Lower investment costs
An ETF incurs certain fees and expenses such as the fund management fees charged by the ETF manager and other administrative costs. These fees and expenses are deducted from the ETF assets and the NAV may be reduced accordingly. Like shares, trading ETFs on an exchange incurs transaction costs including brokerage commissions and clearing fees. As ETFs are passive funds, the annual management fees are generally lower at less than 1% compared to the management fees of 1% to 2% usually charged by most unit trusts or traditional funds.
Access to many markets via a single platform
The range of ETFs offered on an exchange allows investors to access many markets via a single platform. This provides an alternative for investors who are not able to buy securities listed on foreign stock exchanges easily.
Transparency
Investors can readily access real-time information such as ETF prices, fund information and index information on the websites of the issuers, index providers and the exchanges’ websites. Market prices are published real-time through the trading day.
Flexibility
You can buy and sell ETFs anytime during trading hours and may employ the traditional trading techniques including stop order, limit order and short sales.
ETFs, Shares and Unit Trusts
Table 1: The comparison of ETFs, Shares and Unit Trusts in Singapore
| |
ETFs |
Shares |
Unit Trusts |
| Diversification |
Yes |
No |
Yes |
| Price Transparency |
Yes |
Yes |
No |
| Intra-day Trading |
Yes |
Yes |
No |
| Sales Charges |
None^ |
None^ |
3 - 5% |
| Management Fees |
Less than 1% |
None |
1 - 2% |
| Dividend* |
Yes |
Yes |
Yes |
| Traded through a broker |
Yes |
Yes |
No |
| Cash Settlement |
3rd business day after trade date |
3rd business day after trade date |
Upfront |
* Subject to the discretion of the fund manager
^ The usual brokerage commissions apply
ETF Fair Value and Price
The closest estimate to the fair price of an ETF unit is its Net Asset Value (“NAV”) 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. The NAV is calculated once at the end of each trading day. An estimate of the NAV, know as the indicative NAV (“iNAV”) is also calculated periodically throughout the trading day. The iNAV is also known as IOPV (“Indicative Optimised Portfolio Value”) or IIV (“Indicative Intraday Value”).
The NAV of an ETF reflects the fair value of an ETF unit, while an ETF may trade at a price that differs from its NAV. Like shares, the price of an ETF can trade above or below its iNAV. When the ETF price is above the iNAV, the ETF is said to be trading at a premium and vice versa. The creation and redemption of the ETF can impact its price,as the participating dealer can create or redeem ETF units in order to meet market demand.
Redemption of ETF units
Retail investors cannot purchase or redeem ETF units through the ETF manager like they do for normal mutual funds and unit trusts. Instead retail investors go through the Participating Dealer. For ETFs, there is a minimum creation and redemption size stipulated in the prospectus.
Dividends
An ETF may or may not distribute dividends, depending on its dividend policy. ETF managers will determine if dividends arising are better re-invested or distributed as income to investors. Investors are advised to look into the distribution policy as disclosed in the ETF prospectus and refer to the dividend announcements made by the fund manager.
How does an ETF track an index?
ETFs aim to track the index and not to outperform or underperform the index.
An ETF can track an index by the following methods:-
- Holding all securities in the same proportion as the securities that make up the index.
- Holding a sample of securities that statistically represents the index.
- Holding a synthetic replication through the use of financial derivative instruments.
Index providers periodically review the securities to include or omit from the index, according to the rules set in the index methodology. ETFs are adjusted to include securities that the index includes, and omit the securities that are removed from the index. This is to ensure that the ETF performance will mirror the performance of the index.
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