Get to Know ETF Funds in Depth

In an era of increasing economic volatility, many investors are turning to investment tools that are secure and offer balanced returns. ETFs or Exchange-Traded Funds are considered one of the best options for those seeking effective diversification. This article explores various aspects of investing with ETFs to help you make informed decisions.

The Importance of Investing in ETFs in the Current Economic Climate

When considering the stock market with over 800 stocks, new investors often feel hesitant about which stocks to choose. Allocating all funds to a single stock can be a high-risk decision. That’s why ETFs have become a key tool in building a stable and diversified investment portfolio.

The structure of ETFs allows investors to access a basket of diverse assets with relatively small amounts of capital. Additionally, they typically have lower management fees compared to traditional mutual funds, making them suitable for various types of investors.

What is an ETF? Meaning and Basic Features

ETF (Exchange Traded Fund) is a fund that pools stocks or assets from different regions into a single group and is registered on a stock exchange. Unlike traditional mutual funds, ETFs can be bought and sold like stocks throughout market hours.

Asset management companies (AMCs) manage ETFs with the goal of tracking selected benchmark indices, such as:

• Equity ETF - Investing in stocks within domestic and international markets
• Gold ETF - Providing exposure to gold prices
• Foreign ETF - Tracking foreign stock indices
• Sector ETF - Focusing on specific industries or sectors of the economy

Holders of ETF units are entitled to returns from two sources:

Capital Gains (Capital Gain) - Realized when you sell ETF units at a higher price than the purchase price, allowing you to calculate profit from the difference.

Dividends (Dividend) - Distributed from fund management, depending on the number of units held (after deducting fees).

Types of ETFs: A Wide Range

The current market offers various ETF formats to meet different investor needs and strategies:

Equity ETFs (Equity ETF)

This type invests in a broad portfolio of stocks, including general markets, specific sectors, or countries. Examples include SPDR S&P 500 ETF (SPY) or Technology Select Sector SPDR (XLK), which focus on the technology sector.

Bond ETFs (Bond ETF)

Aimed at holding government bonds, corporate bonds, or municipal bonds. These funds offer fixed income with lower risk. Examples include iShares Core U.S. Aggregate Bond ETF (AGG).

Commodity ETFs (Commodity ETF)

Provide access to tangible commodities such as gold, silver, oil, or agricultural products without physically holding the assets. Examples include SPDR Gold Shares (GLD) or United States Oil Fund (USO).

Sector & Industry ETFs (Sector & Industry ETF)

Allow investors to target specific sectors expected to grow, such as Financial Select Sector SPDR Fund (XLF) for financial services or iShares U.S. Aerospace & Defense ETF (ITA) for aerospace and defense.

International & Global ETFs (International & Global ETF)

Offer exposure to foreign economies outside the home country, focusing on regions, countries, or global indices. Example: iShares MSCI Emerging Markets ETF (EEM).

Multi-Asset ETFs (Multi-Asset ETF)

Combine stocks, bonds, commodities, and more within a single fund, suitable for those seeking balance and high diversification. Example: Vanguard Balanced ETF Portfolio (VBAL).

Inverse & Leveraged ETFs (Inverse & Leveraged ETF)

Use derivatives to generate inverse returns ((profit when markets decline)) or amplify returns. These are advanced tools for experienced investors. Examples include ProShares Short S&P 500 ETF (SH) or ProShares Ultra S&P 500 (SSO).

Advantages of Investing in ETFs

1. Effective Risk Diversification

Instead of investing all in a single stock, ETFs allow you to spread your money across multiple securities in various industries and regions. This diversification reduces the risk of any one company’s failure.

2. Lower Costs Than Traditional Funds

ETFs generally have lower expense ratios (expense ratio) compared to mutual funds, resulting in higher net returns.

3. No Need to Be a Stock Expert

New investors don’t need to analyze individual stocks, read financial statements, or follow news. Fund managers handle these tasks for you.

4. Liquidity and Flexibility

You can buy and sell ETFs throughout the trading day at market prices, similar to stocks, offering flexibility that mutual funds lack.

5. Tax Efficiency

The special structure of ETFs helps reduce capital gains distributions, leading to lower tax burdens.

Comparing: ETFs vs Stocks vs Mutual Funds

Structure and Trading

• ETFs: Traded on stock exchanges like stocks; prices fluctuate based on supply and demand.
• Stocks: Represent ownership in a single company; traded during market hours.
• Mutual Funds: Bought and sold through fund companies at NAV calculated at the end of each day.

Risk Diversification

• ETFs: Offer diversification across a basket of assets.
• Stocks: Higher risk due to single-company exposure.
• Mutual Funds: Diversified but NAV-based, with trading only at end-of-day prices.

Trading Flexibility

• ETFs: Limited to market trading hours.
• Stocks: Traded throughout market hours.
• Mutual Funds: Cannot be traded intra-day.

Costs

• ETFs: Low fees but may have bid-ask spreads.
• Stocks: Commissions and possible spreads.
• Mutual Funds: Higher fees, including sales loads or redemption fees.

Tax Efficiency

• ETFs: High tax efficiency due to structure.
• Stocks: Taxed on capital gains and dividends.
• Mutual Funds: May distribute capital gains, increasing tax burden.

Important Considerations Before Investing in ETFs

1. No Minimum Holding Period, But Scope Is Needed - ETF prices fluctuate with the market; short-term losses are possible, but long-term returns are often favorable. Suitable for long-term outlooks.

2. Management Fees Apply - Fees are deducted from returns and reflected in NAV.

3. Index Price and Underlying Asset Price May Differ - Due to management fees, known as “Tracking Error.”

4. Returns May Be Lower Than Individual Stocks - Due to averaging, but with lower risk.

Who Should Consider Investing in ETFs?

Beginner Investors

ETFs are suitable because:

• No need to analyze individual stocks
• Require less capital
• Offer good diversification
• Managed by professionals

Long-term Investors

ETFs are ideal for those seeking:

• Steady growth returns
• Effective risk diversification
• Accumulated dividends
• Low management costs

How to Buy ETFs

Trading ETFs is as straightforward as buying stocks if you have prior trading experience:

Method 1: Via Streaming Application

1. Register for the app (must have a stock exchange account)
2. Go to “Watch” and select “Favorite”
3. Tap “SET” and search “.ETFs”
4. Choose “Buy” to purchase or “Sell” to sell
5. Enter fund name, amount, price, and your PIN
6. Confirm the order

Method 2: Through a Broker

Contact a broker at the exchange, who can efficiently process your order and provide additional advice.

Note: You must open a stock exchange account before you can buy or sell ETFs.

Summary

Investing in ETFs involves building continuous value for your assets based on manageable risk. If you are looking for investment tools both domestically and internationally that offer good diversification, liquidity, and low costs, ETFs are the right choice for you. Whether you are a beginner or experienced investor, ETFs provide opportunities to create a balanced and sustainable investment portfolio.