The very first ETF was started in 1993 by State Street Global Advisors (SSgA). This original ETF, (SPY) is one of the most popular ETFs available today-having more assets invested than any other ETF, which tracks the performance of the S&P 500 index.

·                     Efficiency

o        Diversify in a single investment, gain instant exposure to the basket of securities held in the fund portfolio.

o        Getting into markets that are not easily accessible, e.g. Shanghai A shares.

o        Invest at a lower cost compared to your mutual funds.

·                      Transparency

o        Access to real time information such as prices and fund/index information. Investors now can regularly monitor and have up-to-date information on their investment.

o        Trade ETFs at bid/ask prices provided by market maker (liquidity).

·                     Flexibility

o        Trade ETFs like shares thorough your brokers anytime during market hours, just like shares

·                   Market Risk

o                   Investors are exposed to market risk or volatility of the specific underlying which the ETF tracks.

o                   In unfavorable market conditions where the general level of underlying (stock, bonds, commodities or currencies) price decline, the value of ETFs will decline accordingly.

·                   Tracking error

o                   Risk that the ETF may not be able to exactly replicate the performance of the underlying.

o                   Error may occur because the methods of sampling are not 100% accurate.

·                   Foreign exchange risk

o                   If the price of ETF is priced in one currency (USD) and is different from the functional currency of the investors, investors will be exposed to fluctuation in foreign exchange rates that may affect the returns on the ETF.

·                   Credit /Counterparties risk

o                   Risk that the issuers may not meet their obligations in non-synthetic ETFs.

o                   Risk that the counterparties of swap arrangement may not meet their obligations in synthetic ETFs.

1.       Strategic Holding (“Buy and Hold”)

Utilize ETFs to gain diversification in a cost efficient manner, as ETF allow exposure to specific country, sector, bond, commodity and even restricted/fairly restricted markets.

2.       Hedging

ETF can be use as a hedging tool against other investment positions, whether fully or partially, thus protecting the investors against market fluctuation.

3.       Core-satellite trading strategies

         Investors hold ETF in their portfolios as their core investment as ETF provides instant diversification at significantly lower costs. Remaining resources may then be used to invest directly on specific securities (Satellite investments) to complete the whole strategy.

1. Market Index ETF:

·          Market Index ETF is a single investment tool that tracks a particular stock market index. Objective of Market Index ETF is to track the underlying index but not out-performing it.

·          E.g. iShares FTSE/Xinhua A50 traded in HK – 2823.HK and SPDR S & P 500 ETF Trust.

Why market index ETF:

·          Gain exposure to markets, with limited access, e.g. Shanghai ‘A’ shares.

·          Gain exposure to markets which investors have limited knowledge, e.g. Hungary, Spain, Turkey, etc.

·          Hedge against risk in a certain market.

2. Currency ETF:

·          Currencies ETF seek to tracks the performance of a single currency or a basket of currencies, thus allowing investors to have access to more than one foreign currency.

·          E.g. CurrencyShares Euro Trust and Wisdomtree China Yuan Fund.

Why currency ETF:

·          Gain exposure to a particular currency or basket of currencies.

·          Hedge against the foreign currencies exposure in your portfolio.

·          Simplified transaction compared to directly trading foreign currencies.

3. Commodity ETF:

·          Commodity ETF seek to tracks the performance of the underlying commodity, like gold, silver, platinum, coal, oil, natural gas, corn, etc.

·          Made up of futures contract on the underlying commodity or assets backed contract.

·          E.g. Gold 10US$ (listed on SGX), US Natural Gas Fund, iShares Silver Trust, etc.

Why commodity ETF:

·          Gain exposure to physical commodities such as, basic materials (gold, silver, platinum, etc), agriculture product (corn, wheat, etc) and energy sources (oil, natural gas, coal, etc).

·          Hedge against the risk of the commodities.

4. Bonds ETF:

·          Bond ETF seeks to track a correlating bond index or bond product.

·          E.g. ABF Singapore Bond Index Fund, iShare Barclays 20+ Years Treasury Bond Fund, etc.

Why Bond ETF:

·          Liquid, transparent in pricing and available to the secondary market.

5. Sector ETF:

·          Sector ETF seek to track the performance of the underlying sector index.

·          E.g. Financial Select Sector SPDR, iShares CSI A-Shares Financial, etc.

Why Sector ETF:

·          Concentration on sectors of interest rather then buying index on a whole.

·          Ability to participate in a specific sector with lower cost of diversification, compared to buying individual stocks in that specific sector.

6. Style ETF:

·          Style ETF seeks to track the performance of a specific style or investment strategy.

·          E.g. iShares Russell 1000 Growth, iShares Russell 1000 Value, etc.

Why Style ETF:

·          Assist investors to passively explore an investment style which can be used to achieve some investment goals.

·          Allow investors to test out the various styles ETF, to find out the most suitable style for them.

7. Inverse ETF:

·          Inverse ETF seeks to track the inverse performance of its underlying indexes, commodities, bonds and currencies.

·          E.g. Proshares Ultrashort S&P 500, Proshares Ultrashort Financial, etc.

Why inverse ETF:

·          Ability to gain downside exposure when the markets turn/correct.

·          Ability to hedge against your long positions.

8. Leveraged ETF:

·          Leveraged ETF seek to track the performance of underlying indexes, commodities, bonds and currencies by 2–3 times, depending on the ETF. A 2x leveraged ETF will have 2% ROI if the underlying index, commodity, bonds and currencies goes up by 1%.

·          E.g. Direxion Daily Financial Bull 3x, Proshares Ultra S&P 500, etc.

Why leveraged ETF:

·          Double or triple your exposure with your initial investment sum depending on how much leveraged you want.

·          Suitable for shorter term trading. E.g. Daily.

Ans: An Exchange Traded Fund (ETF) is an open-ended investment fund listed and traded on stock exchanges. An ETF aims to track the performance of an underlying index, bonds, commodity or currencies, and trades like a stock on an exchange.

2. Where are ETFs being traded?

Ans: You can purchase ETF via any brokerage houses (e.g. OCBC Securities); they are traded like stocks on an exchange.

3. What are the differences between ETFs and Mutual Funds (Unit Trusts)?

Ans: The differences are:

·          For ETFs, there are no sales charge, unlike mutual funds (unit trusts) which charge a sales charge of 3-5%.

·          ETFs charge lower management fees of less than 1% compared to 1-2% of what a unit trust usually charges.

·          ETFs offer intra day pricing, but not for mutual funds, which offer end of day pricing.

4. What are the differences between ETFs and Stocks?

Ans: The differences are:

·          Purchase of ETF allows exposure to a basket of securities, whereas stocks only allow exposure to one company.

·          Small amount of management fee is being charged for ETF purchase, whereas for stocks, there is no management fee incurred. Normal brokerage and standard charges would be applicable for both stocks and ETFs.

5. Are ETF only for stocks?

Ans: No, ETFs comes with various underlying assets, like equities, commodities, bonds and currencies.

6. What is the performance of ETFs?

Ans: ETFs performances are based on the underlying assets and benchmark, and the function of the fund manager is to track as closely to the underlying assets and benchmark as possible, reducing the tracking error.

7. Is there liquidity and volatility to trade ETF for potential short term gain?

Ans: Liquidity is provided by the market maker assigned by the issuers and in addition, the market participants add on to that amount of liquidity. Citing an example in Hong Kong, 2823HK has an average daily traded volume of 60 – 100 million shares per day, with certain intra day change in price of a few percent depending on the underlying.

Therefore, ETF is an investment tool that day/trend trader can use for their short term trading needs with the liquidity and volatility it presents.

8. Can ETF be use for short term trading?

Ans: With intra day liquidity and transparency in pricing on stock exchanges, ETFs can be used for short term/intra day trading.

For more information, kindly email us at productsgroup@ocbcsec.com.

For more information about ETFs, please visit their issuers' website.

Disclaimer: 1.The information, opinions or views of third parties expressed in this material are those of the third parties identified, and not those of OCBC Securities.2.The information provided herein is intended for general circulation and/or discussion purposes only and may not be published, circulated, reproduced or distributed in whole or in part to any other person without our written consent.3.It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Please seek advice from a financial adviser regarding the suitability of any investment product taking into account your specific investment objectives, financial situation or particular needs before you make a commitment to purchase the investment product. In the event that you choose not to seek advice from a financial adviser you should consider whether the product in question is suitable for you.4.This does not constitute an offer or solicitation to buy or sell or subscribe for any security or financial instrument or to enter into a transaction or to participate in any particular trading or investment strategy.5.No representation or warranty whatsoever (including without limitation, any representation or warranty as to accuracy, usefulness, adequacy, timeliness or completeness) in respect of any information (including without limitation any statement, figures, opinion, view or estimate) provided herein is given by OCBC Securities and it should not be relied upon. OCBC Securities does not undertake an obligation to update the information or to correct any inaccuracy that may become apparent at a later time. All information presented is subject to change without notice. OCBC Securities shall not be responsible or liable for any loss or damage whatsoever arising directly or indirectly howsoever in connection with or as a result of any person acting on any information provided herein.

1) The information provided herein is intended for general circulation and/or discussion purposes only and may not be published, circulated, reproduced or distributed in whole or in part to any other person without our written consent.

2) It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Please seek advice from a financial adviser regarding the suitability of any investment product taking into account your specific investment objectives, financial situation or particular needs before you make a commitment to purchase the investment product. In the event that you choose not to seek advice from a financial adviser you should consider whether the product in question is suitable for you.

3) This does not constitute an offer or solicitation to buy or sell or subscribe for any security or financial instrument or to enter into a transaction or to participate in any particular trading or investment strategy.

4) No representation or warranty whatsoever (including without limitation, any representation or warranty as to accuracy, usefulness, adequacy, timeliness or completeness) in respect of any information (including without limitation any statement, figures, opinion, view or estimate) provided herein is given by OCBC Securities and it should not be relied upon. OCBC Securities does not undertake an obligation to update the information or to correct any inaccuracy that may become apparent at a later time. All information presented is subject to change without notice. OCBC Securities shall not be responsible or liable for any loss or damage whatsoever arising directly or indirectly howsoever in connection with or as a result of any person acting on any information provided herein.

5) Trading in equities can be very risky, and you may lose all of or more than the principal amount. This is particularly so when you need to (i) make your own trading decisions and (ii) ensure each trade is specifically suitable for you – the only basis for any trading through or with OCBC Securities Private Limited (“OSPL”).