What is ETF? Advantages, Disadvantages, and Selection Guide of ETF

A financial show: TSMC shares have risen above $500! Dati Takahiro again stood back at $2,000. As small investors, a TSMC stock moved several million and a Dachikong stock soared past two million, and it was hard to want to own them at the same time. However, there is now an investment commodity that will help you easily own these equity securities, which is ETF. What exactly is an ETF? What are the benefits after purchase? Let's just keep looking.

What is an ETF?

An ETF (Exchange Traded Fund) is an investment instrument called an index fund. Trade on stock exchanges by collecting a variety of assets to form a fund portfolio. IT BUYS AND SELLS FUND SHARES THROUGH STOCK EXCHANGES IN THE MANNER OF STOCK TRADING. An ETF's fund portfolio includes a variety of assets, and although equity funds are most common, they can be one of the benchmarks of an ETF, such as bonds, futures commodities, currencies, and more. Familiar with Taiwanese families”Yuanta Taiwan Outstanding 50 Securities Investment Trust Fund(0050, abbreviated as YUDA50), for example, it is Taiwan's first-tier ETF, managed by Yuanda Polls and launched in December 2003. The stocks that make up the Yuan-50 are also fairly straightforward, i.e. directly buying equity shares in the top 50 of the Taiwan Weighted Stock Price Index, so the volatility of 0050 is almost identical to the rise and fall of the Taiwan Weighted Index. THE YUDA50 HAS BECOME THE LARGEST ETF IN TAIWAN AND ONE OF THE MOST SUCCESSFUL ETFS IN ALL OF ASIA, WITH OVER 60,000 TAIWANESE SHAREHOLDERS HOLDING YUDA50, AND ITS APPEAL IS WELL KNOWN.

What are the advantages of ETFs?

1. Diversified Portfolio: ETFs typically contain multiple stocks or other risk assets that investors can spread risk through one ETF.
2. Easy trading: ETFs are traded on stock exchanges like stocks, and investors can buy or sell at any time via computer or mobile phone.
3. RELATIVELY LOW FRICTION COSTS: ETF MANAGEMENT FEES AND TRADING COSTS ARE OFTEN LOWER THAN TRADITIONAL FUNDS OR OTHER INVESTMENT PRODUCTS. (The transaction fee for ETFs is only 0.1%, and stocks are 0.3%.)
4. HIGH TRANSPARENCY: ETF PORTFOLIOS AND NET VALUES ARE OFTEN PUBLICLY TRANSPARENT, SO INVESTORS CAN BETTER UNDERSTAND HOW THEIR FUNDS ARE ALLOCATED TO THOSE ASSETS.

Disadvantages and Risks of ETFs

So many benefits of buying ETFs have been said before, but in fact buying ETFs is not entirely risk-free, and the following points must be read carefully.

1. Large environmental risk: The price volatility of ETFs is influenced by the overall macro market situation, so it is possible that the price of the ETF will fall in the price of the ETF under the influence of an unfavorable environment (such as rising interest rates, reducing the balance sheet of various central banks, etc.). Or, in times of global economic uncertainty, the stock market underperforms overall, which can negatively affect the performance of ETFs.
2. Remuneration may not be the same as a stock: While ETFs can disperse investment risk, they avoid excess returns while avoiding risk. The return of an ETF may be less than that of a single stock during a bull market. Because there are quite a few different types of stocks in one ETF, the ups and downs of these stocks will also differ. In some situations (such as biotech stocks during the pandemic), some stocks may outperform the market as a whole, but because the ETF may contain some stocks that perform relatively poorly, the overall return of the ETF may be dragged down rather than the performance of a single stock.
3. LIQUIDITY RISK: ALTHOUGH ETFS ARE LISTED ON EXCHANGES, SOME ETFS ARE SMALL IN SIZE (FOR EXAMPLE, THERE MAY BE ONLY DOZENS OF INVESTORS), WHICH CAUSES A HUGE GAP BETWEEN BUY AND SELL PRICES WHEN THERE IS INSUFFICIENT DEMAND IN THE MARKET (BECAUSE THE INVESTOR WHO WANTS TO SELL CANNOT FIND THE INVESTMENT THEY WANT TO BUY people), which makes the price of the ETF very large.
4. Forex Risk: If you want to buy an overseas ETF product (such as an ETF in the US), forex risk is involved. Because buying and selling ETFs may require an exchange. If the Taiwan dollar depreciates against the USD, then the cost of buying a US ETF will increase and vice versa.

How to choose an ETF?

In order to avoid the risks mentioned above, therefore,Choose a large and liquid ETF as much as possible。 ETFs with better liquidity often have higher trading volumes and less price volatility, making it easier for investors to buy and sell ETFs to avoid the problem of excessive spreads. In addition, choosing ETFs that have a longer time to invest in is also relatively stable. The comparison is able to judge the advantages of this ETF due to the large number of data that can be referenced and the performance of past investments. In sum, buying an ETF is a passive investment, and ETFs disperse funds across different types of stocks, thus achieving the effect of diversifying risk. Therefore, if you are an investor with little risk tolerance and do not have the time to research stocks, perhaps suitable for buying high-quality ETFs on a regular basis, will accumulate more in the near future and become the best in the ETF market!