ETFs: A low-cost
alternative
Exchange-traded funds (ETFs) are attracting ever greater attention from investors.
They continue to grow globally, with assets of more than USD 2.7 trillion.1 That trend
translates to the Asia region, where ETFs have become increasingly popular. In the
last five years, both the assets and the number of Asia-region ETFs have more
than tripled.2
This guide will help you understand how ETFs work and the benefits of using ETFs
in your clients’ portfolios. Contact a sales executive through vanguard.sg to learn
even more.
What are ETFs?
An ETF is an open-ended fund quoted for trading
on a securities exchange. Generally ETFs are
constructed as indexed portfolios of stocks, bonds
or real estate securities. Similar to individual stocks,
ETFs can be bought and sold through brokerage
accounts during market hours at intraday prices,
rather than at end-of-day
prices as with unlisted
managed funds.
Index fund
characteristics
Like index mutual funds,
Diversification
ETFs offer diversification
Low fees
benefits and low fees, but
Low portfolio turnover
with the added benefits of
liquidity and trading flexibility
of individual stocks.
While most mutual funds are actively managed,
ETFs are primarily passively managed index
investments. They seek to track the performance
of a broad market or a specific portion of it.
Individual stock
characteristics
Exchangetraded fund
Continuous pricing
Trading flexibility
Low execution costs
1 All figures are as at 31 December 2013 and are denominated in US dollars, unless otherwise noted.
2 Source: Vanguard calculations using data from ETFGI as at 31 December 2013.
For Accredited Investors and Institutional Investors as defined in section 4A of the Securities and Futures Act (Cap.289).
Not for public distribution.
Comparing ETFs with mutual funds
ETFs
Index mutual funds
Actively managed
mutual funds
Access
Shares bought and
sold through a
stockbroker or platform
offering brokerage
services
Shares bought and
sold directly through
the fund company or
through an adviser
Shares bought and
sold directly through
the fund company or
through an adviser
Pricing
Share prices set by
the market throughout
the trading day
Net asset values
determined once
per trading day, after
financial markets close
Net asset values
determined once
per trading day, after
financial markets close
Average TER3
0.73%
0.77%
1.74%
Transaction costs
Brokerage commissions Sales charge
and bid-ask spreads on (for most funds)
each direct purchase
and sale
Sales charge
(for most funds)
Client services
Provided by the broker
Provided by the fund
sponsor or a broker
The benefits of using ETFs
ETFs’ characteristics and potential benefits include:
• Low costs. ETFs generally have lower total
expense ratios, or annual operating costs as a
percentage of average net assets, than actively
managed funds. Lower costs mean more of a
fund’s returns go to the investor.
Provided by the fund
sponsor or a broker
• Trading flexibility. ETFs are traded on a stock
exchange, so they can be bought and sold
through an adviser or a brokerage account
any time the exchange is open.
• Diversification. An ETF might contain hundreds
or thousands of securities, more than many
actively managed funds and far more than
a typical portfolio of individual securities.
Diversification helps to control risk by reducing
the impact of swings in performance by any
one security or market segment.
3 Source: Vanguard calculations using data from Morningstar as at 12 February 2014. Includes mutual funds and ETFs registered for sale in Hong Kong, regardless of country of domicile.
ETF data include all primary and secondary listings on the Hong Kong Stock Exchange.
2
For Accredited Investors and Institutional Investors as defined in section 4A of the Securities and Futures Act (Cap.289).
Not for public distribution.
• Transparency. Most ETFs hold the same
securities, or a representative sample, as
their benchmark indices, so you’ll always
know what you’re investing in.
• Low manager risk. Index-based ETFs virtually
eliminate exposure to manager risk. That’s
because they seek to track, not outperform,
a market index.
Buying and selling ETFs
ETFs are not traded directly with a fund
management company. Instead, they are bought
or sold any time during stock market trading hours
directly with the exchange through a broker, adviser
or brokerage account (See Figure 1).
To help ensure best execution when buying
or selling ETFs, consider the following:
Consider using a block desk. When you place
large orders, a block desk can break your trade
into smaller increments over time to manage the
impact of a large trade. Or it can create or redeem
shares directly with the ETF sponsor so as not to
affect prices on the secondary market. Your block
desk can also review pricing depth before placing
a trade.
Remember the basics. Pay attention to earnings
announcements and other news from companies
that are large constituents of an ETF’s benchmark
and to news such as the release of economic
indicators. ETFs can trade at larger premiums
or discounts during market swings, which such
news can prompt.
As you consider ETFs for your clients’ portfolios,
you can count on Vanguard’s indexing expertise and
our record of putting investors first.
Be aware at the open and close. At the open, not
all underlying securities in an ETF may have begun
trading. In such situations, the market maker can’t
price the ETF with certainty, potentially causing
wider bid-ask spreads. At the close, fewer firms
may be making markets in the ETF and fewer
shares may be listed for purchase and sale than
throughout the trading day.
Figure 1
ETF
buyer
Investment
adviser
Marketplace
Investment
adviser
For Accredited Investors and Institutional Investors as defined in section 4A of the Securities and Futures Act (Cap.289).
Not for public distribution.
ETF
seller
3
Vanguard Investments Singapore Pte Ltd
3 Phillip Street
#07-01 Royal Group Building
Singapore 048693
[email protected]
Connect with Vanguard™
vanguard.sg
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