20 Feb 2020
I have read about ETFs, tracks and replicates the return on an index. What exactly does it mean by lay man terms ? Would be grateful if there is a example to show based on Singapore context ETFs. Like how does it track and replicate.
Yes, thats simple:
-most (but not all) mutual funds (unit trusts) are actively managed: the managing team buys and sells constantly stocks (thus generating 'hidden fees') in an effort to 'beat' the average market = indices (they rarely are longterm successful, contrary to popular belief). I You'd be buying only single stocks you also are a 'stock' picking manager of your funds.
-passive approaches only buy the index components according to market cap (and readjust their holdings 1-4 times a year), so no big research needed = low fees
A simple formula to follow:
Higher activity = higher fees
More layers = higher fees
ETF are passively managed funds = Lowest fees as they track a broad-based index benchmark; Eg, S&P500, STI
Actively Managed = Manager follows investment guidelines of the fund. Eg: Value centric, hedging strategies, sector-specific, technological plays.
There might be tracking errors for the index which do not have high liquidity - you can see such errors in markets where liquidity and regulation give way to tracking errors (China and India).
For a layman, go for passively low-cost index funds till you do your homework on actively managed funds.
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