What is an ETF?
An Exchange Traded Fund or ETF is an open-end investment company that trades its shares in the stock exchange. An ETF company issues its shares in blocks called “Creation Units” in exchange for a basket of securities comprising the index it wishes to track. Creation is normally done by institutional investors, who break down the block into smaller portions and sell to retail investors in the Exchange.
ETFs have become one of the fastest growing investments in the world because they are simple to understand and provide opportunities for investors to create a diversified portfolio of stock with lower investment costs. Various funds have also set up ETFs because they are simpler to administer and have lower expense requirements compared to mutual funds or unit investment trust funds.
What is an INDEX?
Index is an indicator to measure or monitor the performance of a group of securities. For the PSE, its main index is the PSEi, which is composed of 30 of the largest and most liquid stocks.
Why invest in ETFs?
ETFs provide numerous advantages and benefits to investors, as follows:
- Investors can diversify their investments in stocks with minimal capital outlay, allowing smaller retail investors to have access to blue chip companies. Diversification is an investment strategy that allows attainment of long-term goals while minimizing risk.
- Investors, especially those who do not have enough time to monitor the stock market, can enjoy the returns of the overall market without having to actively manage their portfolio.
- Because ETFs are traded in the Exchange, investors can immediately find out the ETF price (i.e. real-time) without having to wait for end-of-day, as observed in other investment funds.
- Unlike other investment funds, ETFs have no sales-load commissions.
- Some investment funds require a holding period and impose a surcharge on pre-termination. ETFs do not have this restriction, as it may be purchased and sold anytime during trading hours.
- Investors know the composition of securities the ETF company has (i.e. the index components). Other investment funds may opt to actively manage the fund and change the composition of its investment in securities without the prior knowledge of the investor.
- ETFs present new opportunities for participants to earn returns through arbitrage, making this product attractive to institutional investors.
- Investors can return the ETF shares in quantities of the Creation Unit in exchange for the underlying shares (i.e. the basket of securities).