Smart ETF Investing Strategies

By Jack Liang

Research shows that only 20 per cent of Australians hold ETFs, demonstrating that many people don’t know where to start when it comes to investment.
Tiger Brokers breaks down the basics of what you need to know to start investing in ETFs. Gain the empowerment to independently navigate investment choices, accessing global markets right at your fingertips. 
In the dynamic landscape of modern finance, Exchange-Traded Funds (ETFs) have emerged as powerful tools for investors seeking diversified exposure and strategic wealth management. 

What are ETFs and what’s their creation and redemption process? 

An ETF tracks multiple stocks, securities, or other assets to let you invest in a sector, industry, region and an increasingly endless list of options. You could also track an index through an ETF, so you don’t have to pick individual stocks. By investing in an ETF, investors can spread their money across a group of investments, giving instant diversification. Put simply, an ETF is a stock that exists purely to invest in other stocks or assets. You can easily trade ETFs through Tiger Brokers with numerous ETFs listed on all trading platforms around the world. 

Advantages of ETFs 

The biggest advantage of investing in ETFs is the diversification and low risk nature of these stocks. ETFs allow investors to access many stocks across various industries, for example, they may track different industries, sectors, or types of companies. They may offer risk management through diversification. Given they invest in a broad range of companies, ETFs are typically protected from significant losses. As ETFs typically track the sector they invest in, steady gains are a common trait of ETFs. Investing in an ETF is similar to investing in an individual stock, the main difference is that investing in an ETF means you’re investing in a particular group of stocks. Because they’re traded on an exchange, you get visibility on share price movements and can sell your shares whenever there are interested buyers. 
ETFs are known for their flexibility and efficiency, providing a gateway to a broad array of asset classes, from stocks and bonds to commodities and beyond. Whether you’re exploring investment options or aiming to optimise your portfolio, understanding the nuances of ETFs is a crucial step towards financial empowerment.

Different types of ETF? 

There are a few types of ETFs that are currently available to investors each with its own basket of companies specific to the ETFs purpose and creation. The different types of ETFs can be characterised into 7 categories. 

1. Bond ETFs 

Bond ETFs invest in various income securities and like stock ETFs, they are grouped into certain categories. Their income distribution depends on the performance of the underlying bonds. They might include government bonds, corporate bonds, and state and local bonds. Unlike the underlying instruments, which are normally with a long period of maturity, bond ETFs do not have a maturity date. 

2. Stock ETFs 

Stock ETFs are a basket of stocks that track a single industry or sector. For example, a stock ETF might track automotive or foreign stocks. The aim is to provide diversified exposure to a single industry, one that includes high performers and new entrants with potential for growth. Unlike stock mutual funds, stock ETFs have lower fees and do not involve actual ownership of securities. 

3. Industry/Sector ETFs 

Industry or sector ETFs are funds that focus on a specific sector or industry. Industry/Sector ETFs give you access to a very small part of the overall market, such as energy, real estate, fashion, and health care, among others. Sector ETFs offer varied stability, depending on which industry you select. 

4. Currency ETFs 

Currency ETFs are pooled investment vehicles that track the performance of currency pairs, consisting of domestic and foreign currencies. Currency ETFs can be used to speculate on the prices of currencies based on political and economic developments in a country. They are also used to diversify a portfolio or as a hedge against volatility in forex markets by importers and exporters. 

5. Commodity ETFs 

Commodity ETFs usually focus on physical commodities, such as agricultural goods, natural resources, and precious metals. A commodity ETF is usually focused on either a single commodity held in physical
storage or investments in the commodities futures contract. Long-term investors should consider the security of underlying assets, such as the “contango” and “roll cost” problems. 

6. Inverse ETFs 

When the stock market is falling or a particular market sector or commodity is struggling individual investors can make bearish trades that will profit from those declines. Shorting is done by selling a stock when expecting a decline in value, and repurchasing it at a lower price. Traditionally this meant that investors had to be able to short stocks or use options, but now there is another way to profit from the downside of the market using inverse ETFs. Inverse ETFs are quite common, such as equity, currency, fixed income, alternatives etc. 

7. Leveraged ETFs 

Leverage involves borrowing in order to amplify the returns of an investment. This means that potential gains, but also losses, can be increased. For instance, if the S&P 500 rises one per cent, an S&P 500 ETF Bull ETF will return two per cent (and if the index falls by one per cent, the ETF would lose two per cent). However, leveraged ETFs such as triple-leveraged (3x) ETFs come with considerable risk and are not appropriate for long-term investing. 
To begin, investors can explore a selection of popular ETFs to gain insight into specific sectors and their grouping. Notable examples of ETFs include VDHG, DHHF, VAS, NDQ, and A200. 

How to buy ETFs 

You can buy ETFs by purchasing shares in a publicly listed company. Simply open a Tiger Trade account to begin comparing ETFs to find the stocks that best suit you and place an order and monitor your investment. 
ETFs act as pillars of financial innovation, providing investors with unparalleled access to diversified markets and strategic investment opportunities. ETFs offer a user-friendly and cost-effective avenue for building resilient portfolios. 
Whether you are drawn to the simplicity of market-tracking index funds or the intricacies of sector-specific ETFs, the key lies in aligning your investment strategy with your financial goals.

About the author: Jack Liang, Vice President of Tiger Brokers Australia. This is an opinion column. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of this publication.