Wednesday, October 18, 2006

Exchange Traded Funds

Lesson 1 from Economics: Savings equals Investment. To an economy, how much the population save is how much the economy as a whole can invest. The same hold for an individual: how much one can save is how much one can invest. Keeping deposit in banks is also a kind of investment. It is just not much people looking at it that way. Even if you never buy stocks or fund. You are investing, in pure cash, in the form of bank deposit.I have one recommendation. Buying "Exchange Traded Fund". Whenever one accumulates a small sum of money, dump it into ETF. Whether it is Tracker Fund of Singapore, which tracks the Straits Times Index in Singapore, ABF II Asia Bond Fund Index, or Spider, which tracks the S&P in the States, ETF is (one of) the most efficient way of investing in equities/bonds. In addition, by dumping small amount into ETF regularly, one is also "dollar averaging" one's investment. From my investing experience in stocks/futures/options/forex/mutual funds/arbitrage/hedging since 1998, I find this investment method the most efficient one.

Why ETFs? Well, for one, unlike Mutual Funds, prices are real time pricing, which is similar to shares. Mutual funds are forward pricing basis. Mutual Funds have a higher management fees due to the believe that active management can add value to investor's portfolio. But in developed markets like USA where information efficiency is high, there is little room for portfolio managers to exploit pricing inefficiencies and outperform the market. Many managers in US do not outperform the S&P index.

Problem with investing in ETFs in Singapore? Well, liquidity is low. The alternative is to open a US trading Account or HK trading account with a local brokerage and invest in ETFs listed in these markets where liquidity is much higher.

2 comments:

shaan watson said...

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agentprince said...

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