Why would I want to invest in ETFs?
The objective of an ETF is to participate in the economic growth of an industry, sector or commodity. ETFs provide the attraction of the returns of a traditional tracker fund with the liquidity of a stock exchange security.
How do I invest in ETFs?
ETFs are easily accessible to both individual and institutional investors. The usual means of acquiring ETF securities is to purchase these directly from the securities exchange (ie. JSE) through an accredited stockbroker. The costs of this transaction are similar to any share transaction and is usually significantly lower than the costs of dealing with the manager of a unit trust. Click on the, "How to invest" tab on the top of the page to find out more.
How can I profit from ETFs?
As with any other security, investors usually buy and sell their ETFs through the securities exchange. Profits (or losses) are made from the difference between the buying and selling prices. Like any other security, ETFs do however carry the risk of losing rather than gaining money.
Individual investors should view ETFs as core, long-term investments that are to date proven to reduce the price fluctuations that generally characterise arbitrary buying and selling of securities.
ETF investment strategies
ETFs are well suited to individual and institutional investment strategies. Some of the ways ETFs can be utilised include:
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Asset Allocation – ETFs enable individual investors to diversify their investments across portfolio baskets at minimal cost, enabling them to conveniently, efficiently and affordably allocate their assets. |
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Cash Management – investors typically seek exposure to equity markets, but often need time to make investment decisions. ETFs provide a ‘parking place’ for cash that is designated for equity investment. Because ETFs are liquid, investors can participate in the market while deciding where else they can achieve their desired returns. |
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Hedging risks – ETFs are excellent hedging vehicles, as these can be borrowed and sold short. |
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Transition Management – an overriding concern when institutional investors change asset managers is to maintain equity exposure while the transition occurs. An effective method of achieving this goal is to liquidate the portfolio while simultaneously buying ETFs. Once the assets are transitioned, the new manager can redeem the ETF securities to pay for stock purchases. |
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Core-satellite strategy – Core-satellite strategy –this strategy is used to build a cost effective and benchmarked core portfolio based on ETFs. The remaining part of the portfolio (satellites) can be actively managed through investment in selected equities. |