An Exchange Traded Fund (ETF) is an index fund or basket of securities that are listed and traded on the stock exchange like shares. ETFs can be bought or sold through a brokerage firm registered on the exchange and are offered on virtually all asset classes, which range from traditional investments to alternative investments, like commodities or currencies.
Who can invest in ETFs?
- Investors who do not have the time to monitor the stock market and are looking for means to diversify their portfolios.
- Investors who want benchmark returns at minimal costs.
- Investment experts who seek efficient access to other markets and asset classes.
Despite the fact that the Nigerian Stock Exchange (NSE) is the leading ETF market in West Africa in terms of the number of listings, turnover value and market capitalisation, the Nigerian ETF market is still relatively nascent in comparison to the emerging and developed markets.
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In the foreign markets, there are over a thousand ETF products available, offering a great way to increase global exposure whilst tapping into emerging and developed markets. The various types of ETFs include but are not limited to Market ETFs, Bond ETFs, Sector and Industry ETFs, Commodity ETFs, Style ETFs, Exchange Traded Notes, etc.
Advantages of investing in Foreign ETFs
Portfolio Diversification and Efficient Asset Allocation
Have you ever dreamt of investing in Canada or Singapore or Dubai without having deep knowledge of these financial markets? Investing in ETFs offers a great opportunity to do so, as you can just buy a basket of ETFs – stocks, bonds or REIT indexes in a single online brokerage account of yours and track your asset allocation with the click of a button on your phone or laptop.
With ETFs it is also very simple to rebalance your portfolio anytime you want to buy, sell, or short a stock.
Compared to mutual funds, ETFs have lower costs because they are not, for example, required to send in monthly statements, notifications, and transfers to clients.
Fund sponsors are responsible for providing that information only to authorised participants who are the direct owners of creation units. The reduced administrative burden of service and record keeping for thousands of clients means that ETF companies have lower overhead costs, and part of these savings is passed on to individual investors in the form of lower fund expenses.
ETFs are also immune to redemption fees which mutual funds charge when an investor wants to liquidate his money.
ETFs are not susceptible to fraud
Investing in ETFs is very transparent; hence, the transactions are very easy to track and difficult to manipulate. ETFs are bought and sold during normal trading hours, and the pricing is continuous throughout the day and as such, the bid-ask spread is publicly available, so investors know within moments how much was paid to buy shares, and how much they received after selling.