EXCHANGE-traded funds (ETFs) have become the buzzword among US stock market investors because of its appeal for those testing the waters or aiming to invest for long-term gains.
Since we have opened up access to trade US markets, we noticed that when it comes to ETF trading, Rakuten Trade clients tend to favour the top 10 ETFs. We see the same trend happening month on month.
ETFs are a type of index funds that track a basket of securities. Traded on the stock market just like regular shares, have historically produced stable, long-term gains which certainly add to its appeal.
Low entry price
For investors, ETFs are an ideal opportunity to get into multiple stocks at once that may not be within a lower price range.
The rule of thumb when it comes to investing in ETFs is to buy consistently over timing the market.
As they are considered long-term investments, one can simply invest in these on a set schedule and allow them to grow over time.
This growth in capital is tax-free in Malaysia and by buying ETFs routinely, the highs and lows in ETF buying costs are also averaged out.
Top five actively traded ETFs in Rakuten Trade (as of July 19, 2022):
1. SPDR S&P 500 ETF Trust (SPY): USD392.24
2. Vanguard S&P 500 ETF (VOO): USD360.55
3. Vanguard Total World Stock ETF (VT): USD87.51
4. Ark Innovation ETF (ARKK): USD45.79
5. iShares China Large- Cap ETF (FXI): USD31.97
Spreading the risk
As ETFs are not tied to the rise and fall of a single company, but rather a selection of companies, buying an ETF automatically spreads the risk.
Hooi Mun Keong has an extensive background in dealing in equities. He is a digital educator at Rakuten Trade Sdn Bhd and holds a capital market service representative Licence dealing in securities from the Securities Commission Malaysia.
It is generally considered a good practice to invest in a mix of ETFs to lower your portfolio risk. Since the expense is minimal, this would be a good strategy for a beginner.
Post pandemic, new investors find this more appealing as it enables the diversification of their investments into specific sectors or within a broader market.
For example, ARK’s Next Generation Internet ETF focuses on American companies that are pioneering developments in internet technology, like Tesla.
Ownership
The only notable downside of buying ETFs is the lack of ownership in individual stocks.
This would exclude you from the benefits of direct holding, for example, if a stock were to announce corporate activities like dividends.
While ETFs remain foreign to most beginner investors, they are the demographic who stand to benefit the most from such investments.
It reduces the need to pick individual stocks to trade, and instead gives beginner and cautious investors an investment portfolio exposure to a range of stocks at an affordable price.
When you own an ETF, you own a small part of a large portfolio comprising a wide selection of stocks.
At the cost of not being able to handpick the stocks, you can ensure that you receive possible gains from multiple shares, while investing less than the amount the individual share would cost.
