Following the first part of our beginner’s guide on ETF investing, we want to help you better understand what are the types of ETFs you can invest in.
1. Index ETFs
For starters, there is the index ETFs. These ETFs aim to track or replicate a specific index, which explains why they are known as index ETFs. Some of you might be familiar with the Straits Times Index (STI) or the Dow Jones Industrial Average. So, let’s take the STI to explain what an index is.
STI is an index that is used as a benchmark for the performance of Singapore’s stock market. STI tracks the performance of 30 largest companies listed on Singapore Exchange. The idea is that their overall combined performance will give an indication of how Singapore’s stock market is performing daily.
Index ETFs aim to replicate the performance of any index it is tracking. Thus, ETFs like Nikko AM STI ETF or SPDR STI ETF will create a portfolio to simulate ownership of an STI index. In simple terms, the ETF manager will pool resources to buy and hold every stock in the STI.
2. Sector/Industry ETFs
ETFs are not just limited to index ETFs. There are also ETFs that track the performance of a specific sector or industry. These types of ETFs are suitable for those of you who want to gain exposure to a specific sector or industry.
For example, you are positive about the prospects of tech stocks like Alphabet, Apple, Amazon and Microsoft. Thus, you are interested in investing in these stocks. However, if you were to invest in these stocks individually, it might not be feasible for your investing capital. You might end up spending too much on transaction and commission cost.
Instead of investing in individual stocks, you can invest in a tech sector ETF. A tech sector ETF like Vanguard IT ETF or iShares US Tech ETF will give you similar exposure to your desired tech stocks. At the same time, it also reduces your transaction cost and makes it easy to maintain your portfolio.
3. Market Size ETFs
Apart from index and sector/industry specific ETFs, size ETF is another option that is available to you. Size ETFs come in all shapes and sizes. Thus, there’s bound to be something that fits your desired investment style. Size ETFs are categorized by their market capitalization.
Market cap style ETFs are ETFs that track the performance of stocks that fall within the market cap criteria. There are three types of market cap ETFs: Small-cap; Mid-cap; Large-cap style ETFs. Just like the name suggests, they only invest in stocks that fulfil the market cap criteria.
The approach of size ETFs is to track an index that consists of stocks within the market cap range. This is similar to an index ETF. For example, the Vanguard Small Cap ETF tracks the performance of the MSCI US Small Cap 1750 index. MSCI US Small Cap 1750 index is an index of the stocks of small-cap U.S. companies.
4. Style ETFs
You can invest in style ETFs if you have an idea of the kind of investment style you would like to invest with. There are two distinct styles that you should know as an investor: Value and growth.
A value style ETF buys companies whose shares appear to be under-priced. Value style investing compares the company’s financial performance to its current price-to-earnings ratio, dividend yield, or price-to-book ratio.
A growth style ETF does the opposite. Growth style ETFs focus on companies that are growing at a fast rate and are expected to generate earnings growth. Growth style ETFs are willing to overpay what the company is currently worth. The caveat is that there must be potential for growth.
5. Dividend/REITs ETFs
Dividend and REIT investing have been one of the most popular investments among Singaporeans. Thus, in recent years, dividend/REIT ETFs have been launching in the Singapore market. While dividend and REIT ETFs are not exactly the same, these two types of ETFs focus on dividend yielding stocks/REITs. The dividends paid by the underlying companies will be distributed to you as dividends.
6. Bond ETFs
Other than stock ETFs, there are also ETFs that invest in bonds. Bond ETFs are very similar to bond mutual funds. Bond ETFs hold a portfolio of bonds and can differ widely in strategies, ranging from US Treasuries to high yields, from long-term to short-term.
In Singapore, there are three fixed income ETFs. They are ABF Singapore Bond Index ETF, iShares Barclays Captial USD Asia High Yield Bond Index ETF and iShares J.P. Morgan USD Asia Credit Bond Index ETF.
What types of ETFs should you invest in?
There are many types of ETFs that are available to you as an investor. Even though ETFs offer diversification on its own, it is still important to understand what you are investing in and choose them wisely.