First things first: I know that ETF stands for exchange-traded fund… but that’s about it.  Seriously, what is an ETF?

Let’s use unit trust funds as an analogy. Unit trust funds are collective investment schemes where you invest together with a lot of other people. These funds allow you to establish a diversified portfolio quickly without having to cough up a lot of money. An ETF is kind of the same thing but, as its name suggests, it’s listed on the stock exchange. You can buy and sell ETFs like you would a stock.

Tell me how an ETF works in 3 simple steps.

Sure! 

1. The ETF manager picks an index. Let’s say he or she selects the S&P500, which represents the 500 biggest listed companies in the US.
2. The manager then buys all of the stock holdings in the chosen index in their exact proportions, called “The Basket” of stocks. (However, it’s worth noting that most ETF managers could decide to buy a good sample, instead of all of the index holdings, and still make the ETF move together with the index. We’ll save all the technicalities for another day.)
3. Lastly, he or she will list the ETF on the stock exchange by working with “market makers” who will guarantee to buy the ETF from you or sell it to you.

Wait a minute: there are stocks, unit trust funds, and now exchange-traded funds. What are the differences? Which should I invest in?

The argument for unit trust fund managers and stock-pickers using an active management style is that you could get better returns by being opportunistic at getting in and out of stocks and the markets at strategic or tactical moments (e.g. selling your holdings to buy back at lower prices if the market drops). 

But this is somewhat of a “gamble”, as it involves some kind of “bet” on the smarts of the fund manager in picking the right instrument or holding cash at the right time. Research shows that for the large number of actively managed funds, this has fallen short of benchmark return — especially when high costs are involved. 

On the other hand, Akru uses indices and market returns provided by ETFs to aid some kind of reliability in long-term financial planning through passive investing. The market's long-term returns are more than capable of giving the highly unpredictable extraordinary gains from short-term tactical investing a good run for their money.

In other words, if you stay fully invested and ride the ups and downs of the market in the long run, you'll be in a much better place to meet your overall financial goals.

Managing your goals in a way that tries to get you the amount of money you need at a future date is a complex process that goes beyond maxing out returns at all costs. It’s also about weighing all the risks involved.

Are there different types of ETFs out there? Which are the best-performing ones?

This question reminds me of the song “Anything you can do I can do better” by Betty Hutton and Howard Keel. Okay, maybe I’m a bit old-school, but the song uncannily describes the raging debate of ETFs vs unit trust funds, or passive vs active investing.

In a nutshell, if there’s any type of fund you can find in a unit trust fund, you’ll also be able to find them in ETFs and more. Let’s list down just a few examples: you have broad-market ETFs; Country & regional ETFS (which Akru uses); Sector ETFs; Dividend ETFs; Style-based ETFs; Commodity ETFs; Currency ETFs; Bond ETFs; and Thematic ETFs (such as the — Millennial ETF)... I could go on and on. 

However, Akru focuses on less exotic ETFs in the context of long-term goal-management for the reasons I mentioned earlier.

I love that song! I’m with you so far, but very quickly, what are the pros and cons of ETFs?

Pros:

1. Low costs. They’re tiny compared to mutual funds or unit trust funds.
2. Diversification. Each ETF might have hundreds or even thousands of securities.
3. Convenience & transparency. You can trade it anytime during market hours; you don’t have to second guess what you’re buying into; and all of its facts and historical data are easily available.

Cons:

1. Size mismatch. The ETF’s price might not exactly match your desired savings amount, which makes it difficult for you to fill your portfolio with a few ETFs that will suit your needs.
2. ETFs do misbehave. The bid-ask spread is the gap between the ETF’s buying and selling price. If the gap is too big, you’re not buying or selling the ETF at a good price. ETFs can also trade above or below its actual value, called the Net Asset Value. If you buy at a premium or sell at a discount, that is costly to you. This happens on certain days if traders are respectively really optimistic or pessimistic about the ETF.
3. Sensation seeking. The ease of trading might just make you do it for the fun of it––but this raises costs, which eats into your long-term returns.
4. Exotic ETFs. Leveraged ETFs or inverse trackers, anybody? ETFs with names you don’t understand do a good job of inducing a gambling instinct and leading you into dangerous active investing territory.
5. Not exactly goal focused. ETFs on their own still suffer the same problem of unit trust funds: purchases can be quite random. In the same way you can’t only eat cake for a balanced diet, you also need to put together a few ETFs from different asset classes, so that they will all efficiently lead you to your various financial goals.

Okay, so how do I invest in ETFs?

That’s a good question with a simple answer: open a trading account with an online broker that allows you to trade in foreign markets.

But a better question would be: how can I fulfill my financial goals?

At Akru, we’re not asking you to make decisions on whether you want to invest in the US ETF, the China ETF or even the US-China ETF. We’re asking you how much you’d like to save up for retirement. Then, we’ll recommend you a portfolio to help you achieve those goals, and it just so happens that these recommended portfolios contain efficient instruments called ETFs. Oh, and did we mention that we’ll also cover your trading fees, which is better than trading ETFs yourself?