ETFs have received the ‘A’ grade from THE Warren Buffett. Here’s why you could consider investing in them, along with the best way to go about it.
Smart money is a term that’s commonly thrown around in the financial world, referring to capital that’s in the hands of expert investors. These include central banks, institutional investors, and other finance professionals. Perhaps the smartest of them all is Warren Buffett, CEO & Chairman of Berkshire Hathaway and among the world’s wealthiest individuals.
He once said: “It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price”. The Oracle of Omaha might be a serial value investor, but he advises individuals to stick with index funds instead. This lets people easily invest in a basket of these wonderful companies at fair prices.
He walked the talk, winning a million-dollar bet that an ETF (exchange-traded fund) from Vanguard tracking the S&P 500 would outperform several hedge funds across a decade.
Here’s the lowdown on ETFs, and why one of the most successful investors of all time says you should put your money in them instead of actively picking stocks.
(P.S Even professional fund managers have trouble beating the market, with over 88% of them underperforming their benchmarks annually ever since the turn of the millennium.)
- What are ETFs?
- Why should you invest in ETFs?
- What are the risks involved?
- What is the best way to invest in ETFs?
What are ETFs?
As the name suggests, ETFs are funds that have their units traded on a stock exchange. Not only are there funds that track the performance of a stock index, there are those that follow an entire sector or commodity. For example, the Invesco Solar ETF tracks the performance of the solar energy industry via the MAC Global Solar Energy Index.
ETFs have gone mainstream, especially as robo-advisors grow in popularity. For instance, many robo-advisors like Syfe use ETFs as the building blocks of their portfolios to provide diversified, low-cost investing for investors of all stripes.
Enjoy a six-month management fee waiver for when you apply using the SingSaver-exclusive promo code SSWAIVER and make a minimum deposit of S$5,000. Valid for a maximum investment amount of S$50,000 till 30 August 2021. T&Cs apply.
Why should you invest in ETFs?
ETFs grant you the opportunity to instantly diversify your portfolio due to the sheer variety that is available. If you want exposure to gold, SPDR Gold Shares is an ETF that offers investors a convenient way to access the gold market without physically buying and selling gold.
Funds that track a stock index, like the aforementioned Vanguard S&P 500 ETF, are highly diversified as well. It contains stocks from the 500 largest companies in the U.S., such as Apple, Mastercard, and Pfizer. Not only do you gain exposure to a large number of businesses, they’re plying their trade across more than 10 sectors, including IT and healthcare.
To sweeten the deal further, ETFs boast lower fees as compared to unit trusts (also known as mutual funds). This means that you get to keep a higher proportion of your returns.
For example, the ProShares S&P Technology Dividend Aristocrats ETF currently has an expense ratio of just 0.46% p.a., versus the BlackRock BGF World Technology Fund’s management fee of 1.5% p.a. This doesn’t seem like much, but the difference steadily grows as the years go by.
One more advantage of investing in ETFs would be their high level of liquidity. ETFs are traded daily on a stock exchange, so you can cash in quickly if you feel that it’s time to realise your profits. This is in stark contrast to mutual funds, where trading can only take place at the end of the business day after their net asset value is determined.
This liquidity allows robo-advisors to grant clients a high level of flexibility too. Case in point: there are no lock-in periods when you invest with Syfe. You can withdraw anytime you prefer.
What are the risks involved?
Like any other investment out there, ETFs aren’t risk-free. Firstly, an ETF cannot fully track its corresponding index. Typically, there will be a very small tracking error, perhaps only a few tenths of one percent. The reasons for this include needing to have a certain amount of cash on hand and the presence of illiquid securities.
Secondly, you’re not able to control the constituents of an ETF. If you feel that a fund contains too many underperforming businesses, there’s no way to swap them out or jettison them entirely. That said, ETFs are so broadly diversified that even if a few companies underperform, you can still count on the other holdings to do well.
What is the best way to invest in ETFs?
The traditional way to invest in ETFs would be via an online brokerage. You purchase your desired number of units during trading hours and sell them off when you feel the time is right.
Now, this isn’t ideal for several reasons:
- Commission fees will eat into your returns. A 0.5% to 0.8% commission per trade is reasonable for lump-sum investors, but worrying for individuals who adopt dollar-cost averaging.
- How do you ensure that you’re selecting the right ETF for your investment needs? There are over 100 ETF issuers covering nine asset classes after all.
Therefore, the ideal way to invest in ETFs would be via a robo-advisor. Modern robo-advisors craft portfolios that contain an optimised mix of ETFs, allowing for maximised returns and controlled losses.
For instance, Syfe’s all-in-one Core portfolios invest in equity, bond, and gold ETFs to maximise risk-adjusted returns. This diversified set of ETFs has allowed them to achieve a rate of return between 5.1% (Core Defensive) and 28.6% (Core Growth) in the past year alone.
The weightage of each asset class in all Core portfolios are carefully determined by Syfe’s investment team to fit your investment style and goals. For example, if you have a relatively high risk tolerance and intend to invest for the long haul, the Core Growth portfolio has a 70% stock allocation to capitalise on the long-term growth potential of stocks, while the 30% allocation to bonds and gold provides some cushion for your portfolio during market volatility.
In fact, you can invest in multiple Core portfolios that correspond to different financial goals and investing horizons. Who says you can’t have your cake and eat it too?
What if I’m only looking to invest in stocks?
If that’s the case, a 100% equity ETF portfolio can help you achieve your goals in a diversified, cost-efficient manner. One option is Syfe’s Equity100 portfolio. This high-growth portfolio is invested in some of the world’s top stocks like Apple, Microsoft, Amazon, Facebook, Tesla, and more.
Not invested in Chinese companies right now? Equity100 holds two ETFs - iShares MSCI China ETF (MCHI) and KraneShares CSI China Internet ETF (KWEB) - that provide exposure to the broad Chinese stock market and Chinese Internet and tech companies respectively.
Just take a look at how Syfe’s Equity100 solution performed when going head to head against the S&P 500 and MSCI World indexes.
Another highlight is that the Equity100 portfolio is rebalanced bi-annually in order to deliver optimal returns while adapting to changing market conditions.
Not only are ETFs added and removed where needed, the weightage of each one is tweaked precisely.If you’re unsure which ETF portfolio fits your needs, Syfe’s team of wealth experts are on deck to help you out. Schedule a complimentary consultation with them – no account needed.
Enjoy a six-month management fee waiver for when you apply using the SingSaver-exclusive promo code SSWAIVER and make a minimum deposit of S$5,000. Valid for a maximum investment amount of S$50,000 till 31 August 2021. T&Cs apply.
Another oft-repeated nugget of wisdom from Warren Buffett would be “price is what you pay and value is what you get”. When you invest in ETFs, you’re definitely getting a ton of value. They deserve a place in any portfolio, whether to plug the gaps or as a low-cost and fuss-free way to diversify and hedge against market uncertainties.
ETFs do have their downsides, but they can be negated when you invest via a robo-advisor. Take fees and charges for example. Syfe’s management fees start from 0.65% p.a., with no hidden charges or minimum deposits. Grow your portfolio to S$100,000 and voila – it drops to 0.4% p.a.
Remember that complimentary consultation from Syfe’s wealth experts before you sign up? You’ll gain access to them when you start investing as well:
- S$0 - S$19,999: First month only
- S$20,000 - S$99,999: Any time
- S$100,000 - S$499,999: Dedicated team of wealth experts
- S$500,000 and above: Access to Syfe’s Private Wealth offerings
It’s easy to invest in ETFs and much more so when you do it using a robo-advisor. Each solution from Syfe is unique and caters to investors of all experience levels. Whether you’re looking to generate passive income or simply want your savings to work harder for you, Syfe has you covered.
This article was written in partnership with Syfe.
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