Indeed Exchange Traded Funds (ETFs) are finally here. Several weeks ago, the SEC announced the approval of market making provisions of the Philippine Stock Exchange (PSE) rules on ETFs, making possible the start of ETF trading by September 2013. This is a significant development in quite awhile, because it will now allow investors in the Philippines to also benefit from the same experience that US investors have had for 20 years now. ETFs in the US have grown in popularity and have gathered assets at a rapid pace.
What are exchange traded funds and how do they work? Like mutual funds, ETFs will allow investing in an index or any basket of stocks that the organizers offer. However, ETF’s has some advantages over mutual funds such as:
- Trading flexibility. Mutual funds are traded only once, at the end of the day. ETFs are traded like individual stocks in the exchanges throughout the day.
- Lower Cost. Mutual funds charge redemption fees, purchase fees or sales loads when you join. ETFs do not, a significant savings. This translates in better performance.
It is not clear what basket of stocks will the developed, but my guess is there will be one that tries to duplicate the performance of the PSE index, and various ones that will try to mimic the performance of various industries such as banks, property companies, mining stocks, etc. Of course, it will never cover the breadth and depth of the number of ETFs in the US.
In the US because there are about 1,000 ETFs to choose from, you actually need to search a database to identify the best performing ETF’s to invest in. Do you want one that invests in equities only, fixed income, currency, real estate, etc? What country do you want the ETF to invest in? US, Russia, Japan, etc? What sector of the economy do you want to invest in? Financials, consumer discretionary, energy, healthcare, agriculture, etc? After your initial query, you have to scrutinize further because for example, for healthcare alone, there are 25 ETFs.
How to make money trading etf’s? There are ETFs that will make you money if the market goes down, or double the increase of the index (or decrease). There are ETFs for various strategies imaginable to beat the market, such as duplicating Buffet’s approach of selecting stocks.