ETF funds and smart portfolio building

In an era where financial markets are changing rapidly, many investors are beginning to look for ways to allocate their funds that can provide stable returns while effectively managing risk. One highly popular answer is relying on ETF funds, which are highly flexible investment tools. In fact, ETFs are not only suitable for beginner investors but also a main choice for experienced investors.

Basic Understanding of ETFs

ETF or Exchange Traded Fund is an investment vehicle that pools various assets under a single fund. The fund management company (Asset Management Company) manages the fund to deliver returns based on a specified reference index, which can include stocks, bonds, commodities, or other securities.

Investors holding ETF funds receive returns from two main sources: the first is capital gains or price differences, which occur when the ETF’s value increases compared to the purchase price; the second is dividend income or distributions based on the number of units held. Both income types are received after deducting management fees and other expenses.

Different Types of ETFs

The current market offers many types of ETFs, each designed to meet different investment strategies.

Equity ETFs

This group focuses on investing in stocks, allowing investors to access broad market indices, specific industry sectors, or even international markets. This type of investment is suitable for those who believe stocks will grow over the long term.

Bond ETFs

This category invests in government bonds, corporate bonds, and other fixed-income securities, offering investors lower risk returns compared to stocks. Suitable for those seeking steady income over the long term.

Commodity Tracking ETFs

This instrument allows investors to hold exposure to key commodities such as gold, silver, or oil without physically holding the assets. It effectively hedges against inflation.

Sector-focused ETFs

These funds select sectors expected to grow, such as technology, finance, or high industry. They help investors concentrate on specific areas while maintaining diversification.

International ETFs

This type opens access for investors to emerging markets and developed markets outside their home country, increasing geographic diversification of the portfolio.

Multi-asset ETFs

These funds combine stocks, bonds, commodities, and alternative investments within a single fund, creating a balanced risk-return profile. Suitable for those seeking convenience.

Leveraged and Inverse ETFs

These advanced tools use derivatives to generate returns different from the underlying index. Inverse ETFs aim to profit from market declines, while leveraged ETFs amplify returns. These tools are suitable for experienced traders and short-term investors.

Clear Benefits of Investing in ETFs

The widespread popularity of ETFs stems from their benefits, making them an ideal starting point for novice investors.

Portfolio Diversification: When an investor buys just one ETF unit, they gain exposure to hundreds of stocks, spreading risk. Even with a small investment, access to a diversified portfolio is possible, which is impossible when buying individual stocks.

No Need for Expertise: Investors do not need to analyze financial statements, study stock trends, or follow company news. Professional asset managers handle these tasks.

Lower Costs: ETFs typically have a lower (Expense Ratio) than traditional mutual funds, resulting in higher net returns after expenses.

Trading Flexibility: Unlike traditional funds that are priced once daily, ETFs can be bought and sold throughout the trading day at market prices, allowing investors to respond promptly to market changes.

Comparing ETFs with Stocks and Mutual Funds

When compared to other investment tools, ETFs have several distinctive features.

Structure: Stocks represent ownership in a single company. ETFs are a basket of assets traded on the market. Mutual funds are purchased through asset management companies and priced at the end of each trading day based on net asset value.

Risk Diversification: Single stocks carry high risk, focusing on one company. Both ETFs and mutual funds diversify risk, but ETFs often offer more flexibility in adjusting portfolios according to market conditions.

Fees: Stocks incur trading commissions and taxes on gains. ETFs have low costs, while mutual funds may have higher fees.

Tax Efficiency: ETFs have mechanisms that reduce profit distribution, leading to lower tax liabilities for investors. Stocks and mutual funds may have higher tax burdens.

Conditions and Understanding Before Investing

Investing in ETFs has no minimum term, but prices fluctuate with the market. Especially in the short term, there may be losses. Therefore, ETFs are suitable for those with a 3-5 year outlook or longer.

A difference called (tracking error) can occur between the index and the actual ETF price, mainly due to management fees, which is normal and predictable.

Returns from ETFs in some situations may be lower than well-chosen individual stocks, but the risk is clearly lower.

What Type of Investors Are Suitable for ETFs?

Beginner Investors: Find ETFs to be a good structure that does not require analyzing individual stocks. They are accessible with small investments, and risk is managed by experienced professionals.

Long-term Investors: Focus on ETFs because they understand that long-term value is more important than daily volatility. Diversification, dividend income, low costs, and cumulative returns can generate significant growth over time.

How to Buy and Sell ETFs

Trading ETFs is simple and similar to trading stocks, with two main methods:

Trading via Streaming Application

Investors can register with a brokerage firm’s trading app using their trading account number. Once logged in:

1. Go to the “Watch” menu and select “Favorite 1”
2. Navigate to “SET” and search for “.ETFs” to view available funds
3. Tap the “Buy/Sell” icon at the bottom of the screen
4. To buy (Buy): specify the ETF name, number of units, desired price, and personal PIN
5. To sell (Sell): follow the same steps but select the “Sell” tab

Trading via Contacting a Broker

For those needing assistance, brokerage staff can help place buy or sell orders, reducing errors and providing trading advice.

Important to Understand: Before starting ETF trading, you must open a stock market account.

Summary

Investing in ETFs is like creating added value for your assets within a manageable and predictable risk framework. For those interested in domestic and international investments, with good diversification, similar to stocks but safer, and at lower costs, ETFs are a compelling option. Whether you are a beginner or an experienced investor, the key is to start by understanding what ETFs are, their different types, and methods that align with your investment goals.