ETFs: what are these and how they work
ETFs stand for exchange-traded funds, which are purchased or sold on a stock exchange like regular stocks. ETFs are a type of pooled investment security that holds multiple underlying assets. It typically tracks or replicates the performance of a specific benchmark index. It allows investors to invest in a basket of securities with just one trade.
ETFs: a good fit for beginners
Simplicity
Investing in ETF helps save time by removing the need for single stock picking, which is a very time-consuming process due to constantly having to monitor the news, earnings releases, and company financials.
Investors can rest assured that they will get close to market returns, eliminating the need to constantly monitor single stock positions. Furthermore, when a constituent is removed from the index, the ETF does the same. Thus, there is a low barrier to entry for newer investors, as less market knowledge is required. ETFs ultimately offer investors a convenient and simple way to invest in the stock market.
Diversification
By investing in a basket of stocks, it helps to reduce company-specific risks such as management decisions, financial health, and corporate scandals. Investors are able to gain exposure to more than a single company, as well as stocks across different asset classes, sectors, and geographic markets.
Different types of investors and suitable ETFs for their consideration
Ultimately, the choice of investment will depend on the investment goals of the investors. Here are examples of some ETFs that Phillip Nova offers:
Dividend Chasers:
Dividend chasers are individuals who look for another source of income. The investment priority is to attain a regular and passive income stream to supplement the main source of income from the daily job. These are the suitable high-yielding income-generating ETFs:
- Vanguard Dividend Appreciation ETF (VIG)
- Lion-Phillip S-REIT ETF (CLR)
Steady Builders:
Steady builders are individuals who want to avoid “putting all the eggs in one basket” and prefer investing for the long term while diversifying the portfolio across different asset classes, sectors, and geographic regions; but have limited time and financial knowledge to pick an ETF. These are the suitable high-yielding income-generating ETFs:
- SPDR Straits Times Index ETF (ES3)
- Vanguard S&P 500 ETF (VOO)
Tips for successful investing with ETFs
ETF Investors should aim to minimise any overlaps in their holdings. For example, rather than holding three different ETFs that all track the S&P 500, it would be better to consolidate all three of them into just one ETF holding, preferably the fund with the lowest expense ratio.
Examples of successful diversification with ETFs
Successful investors often hold different types of ETFs (asset class, sector, geography, etc.) to diversify, reduce risk, and maximise profits. For example, investors may include a Gold ETF such as SPDR Gold Shares (GLD) in their portfolio to hedge against a downturn. Gold has historically been uncorrelated with the stock market and typically thrives during a recession.
To view complete selection of recommended ETFs to build the 6% dividend return portfolio, download a playbook here.
