ETFs: The fruit basket for your investment portfolio
By Arney Tjaronda
BBA Student: Banking & Finance Major (UNAM).
As eluded by Investopedia: “One identifies exchange traded funds (ETFs) as security that keeps track of an Index, sector, commodity or other assets”. It is rather strange for ETFs to be categorized as a fruit basket for an investment portfolio but just like a fruit basket which contains assorted fruits, ETFs can contain an individual commodity or diverse collections of them. We will dig deeper into ETFs.
Understanding ETFs
As disclosed earlier, ETFs entail various types of investment instruments such as, regular stock, bonds or commodities. It can also contain a mixture of those instruments mentioned previously. These investment vehicles can be bought or sold during market hours-potentially assisting with risk management practices and to help to diversify your portfolio. ETFs are similar to a mutual fund that has a lot of stocks or bonds in a single fund.
They are a great choice for newbies who lack a lot of experience in investing in the markets. ETFs can be very risky when investing in stocks and bonds because you can lose money. Unlike stocks, ETFs have lower expense ratio and minimum broker’s commission. They are traded through brokers either online or via traditional dealings. ETFs which are actively managed usually have high transaction costs. The lack of liquidity hinders transactions.
Types of ETFs
There are various types of ETFs that are pooled, either by popular demand or by the various securities they have. With information from BlackRock (2019), we are going to look at various ETFs:
1. Equity ETFs are the most popular choice because it tracks an index of equities from a specific country. They also inform you on those targeted sectors which may be performing well at a time, like banking and tech stocks.
2. Bond/ Fixed Income ETFs are important when diversifying your portfolio by spreading investment risk. Most professional investors like to invest in them due to the steady return and low risk involved.
3. Commodity ETFs, which are often harder to access than stocks, they contain commodities like gold, silver or oil. They are not always your go to ETFs because they carry more risk because some commodities like gold and oil tend to always go the opposite direction, for example; If gold prices go up, then the oil prices will go down, that is in most case scenario.
4. Sustainable ETFs are the new form of ETFs that combines traditional investment approaches with environmental, social and governance insights.
ETFs on the Namibian Stock Exchange (NSX)
Using the daily published report by the Namibian Stock Exchange (NSX) (July 8,2021), there are currently eleven (11) exchange traded funds on the market with the market cap of 43,337 (in millions). Due to the way how the market is performing, the only ETF that has positive percentage yield is the NewFunds S&P Namibia Bond ETF. The rest have negative yield percentages. If you were to invest in ETFs now- there are a few which I can recommend- honestly, the NewFunds S&P Namibia Bond ETF is the only one I can think of. Reason being that the market is not performing well, hence it is advisable buy and hold that ETF and other Bond securities that are used to hedge against the bear market. Disclaimer, I am not a professional financial expert, therefore it is advisable to consult one. This is my personal opinion.
In conclusion, choosing ETFs as an investment vehicle solely depends on your investment goal. They come in many types with different objectives, giving you a wide range to chose from. There is no investment that comes without risks so chose wisely. But again, this is just one man’s opinion.
