Exchange traded Funds (ETF) allow Constant Capital clients to invest in the performance of a diversified portfolio of securities that may track an index, a sector or an asset class without high management fees and the complication of managing a portfolio of individual securities. This is similar to an open ended unit trust, however unlike a unit trust; ETFs are traded on an exchange just like stocks. This promotes liquidity and enables investors to buy and sell ETFs throughout the market trading session
Diversification – Investing in ETFs that track major Indices such as Hang Seng Index gives investors instant exposure to the companies which constitute the index, without having to buy each of the individual stocks and
incurring excessive brokerage fees.
Global reach – The wide range of ETFs available allows investors to access hard to reach stock market around the world, such as the Indonesian, Russian or Brazilian market.
Lower fees and charges – ETFs have no upfront sales charges, compared with unit trusts. ETFs also tend to require lower management fees.
Exposure to a basket of securities – purchasing ETFs gives investors exposure to a basket of securities effectively. This compares favorably to purchasing a single stock which gives exposure only to a specific company’ performance.
Liquidity and price transparency – ETFs are traded on an exchange as such you can see all the trading data such as time and sales, bid ask prices in real time. ETFs tend to have better liquidity as the fund managers generally provides the market liquidity.
Market risk – Investors are exposed to the price volatility of the underlying assets which the ETF tracks. Generally, when the price level of the underlying declines, the value of ETF declines as well.
Liquidity risk – Active trading of the ETF will not be maintained should the authorized participants or market makers cease to perform its obligations to provide continuous quote in the ETF in the event of adverse market conditions. The result of this is that the buyer may not be able to buy or sell an ETF on a timely manner at a fair price.
Tracking error – Tracking error is a measure of how the value of the ETF may deviate from the value of the underlying which it tracks. Tracking error arises from various circumstances, such as replication methodology and the transaction costs.