ETFs, or exchange-traded funds, have been an increasingly popular investment tool in recent years. Unlike mutual funds, which are priced at the end of a trading day when their share price is determined based on the value of the underlying securities it holds, ETFs represent a higher degree of liquidity. They are bought or sold like stocks, even during market hours.
ETFs trades will typically settle within two days, while some financial institutions may require up to three business days to settle ETF orders. It means that if you purchase an ETF through your broker before midday on Friday (for example), your position will usually become effective by the close of business on Tuesday. However, this also means that you will not be able to sell your ETF until Tuesday at the earliest.
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Taxation
In terms of taxation, gains realised from ETF trading are treated as income and not capital gains. It means that there may be a higher tax rate depending on your tax bracket instead of a lower capital gains rate applied to other investments such as shares or funds under certain conditions.
Major ETF providers
In Singapore, there are currently five major providers of ETFs: SPDR, iShares, WisdomTree Investments, Deutsche Asset Management and UBS E-TRACS. These ETFs are denominated in SGD and represent various asset classes, including equities, commodities and fixed income instruments. Many ETF providers also provide exposure to international markets via their associated mutual funds.
ETFs are commission-free
For customers of DBS/POSB or OCBC, trading in some major iShares ETFs is commission-free. It applies to the following funds: iShares MSCI World Index Fund (Acc), iShares MSCI Emerging Markets Consumer Discretionary Sector Index Fund (Acc), iShares MSCI Emerging Markets Information Technology Sector Index Fund (Acc), and iShares Asia 50 ETF. However, automated investment plans are not commission-free for these four funds.
Over the past few years, many new players have entered the market with various products catering to specific needs. Some of them include Acorn Global Investments, which offers targeted exposure via its age-based portfolios, Franklin Templeton Singapore, which provides multi-currency exposure to US and overseas equities via its LGM range of ETFs.
Volume trading
Regarding trading volume, iShares MSCI Singapore ETF is the most actively traded ETF in the market, with an average daily turnover of over S$27 million. The top three largest issuers by market cap in Singapore are SPDR, UBS ETRACS and WisdomTree Investments.
The settlement period for Singaporean ETFs can vary between three days (T + 3) and five days (T + 5). It may not seem like such a difference, even if it costs you time; however, the ‘T’ in this trading jargon stands for ‘trade’.
If you’re trading an ETF in Singapore, you must be aware of the settlement period that your transaction falls under. While T+3 or T+5 sound like negligible amounts of time, this is not the case for investors trying to buy and sell their investments on the same day.
To conclude
On the one hand, if you plan on buying an ETF during market hours when your order would usually settle at the end of the day (T + 3); however, if your order were to fall on a weekend or public holiday where there was no pre-set closing time (T + 5), then your trade won’t be processed until 8 am of the next business day – causing a mismatch between when you made your order and when the trade is ultimately settled.
Since your investment is ultimately your responsibility, you will still be liable for any liabilities that arise from such a transaction. After all, with ETFs becoming more popular, it’s easy enough to get caught up in this new ‘trend’ without thinking of the consequences, especially if you’re not familiar with market jargon or trading terms like ‘settlement’.
Many things should be considered when trying to navigate the complex world of ETF trading – but investors need to apply due diligence on their part to make an informed decision.
