Friday, October 21, 2011

ETFs and REITs for Investors Abroad


Dear Investor Juan,

I've been following your blog for quite sometime and I really find it very informative. Just this month I started working here in Singapore and I would like to explore some investment opportunities here. I am particularly interested in ETFs and REITs and have been reading about them. However, I am having some difficulty in understanding since most of the explanations online are too "technical". I hope you can enlighten me.

Thank you.


Dear Syd,

Exchange traded funds or ETFs and real estate investment trusts or REITs are popular investment vehicles in more developed markets abroad such as Singapore, as you have mentioned, Hong Kong, and the US. They were designed to give "ordinary" investors like us an opportunity to invest more efficiently, so it's important that we learn as much about these investment instruments as we can.

I actually already discussed these topics in previous posts, but I don't mind discussing them again here briefly, and hopefully more simply.

Exchange traded funds

There are perhaps a hundred different kinds of ETFs available in the market, but the simplest are just pools of funds that are invested in either stocks or bonds, just like UITFs and mutual funds. There are two important differences between ETFs and UITFs and mutual funds, however. One is that ETFs are close-ended, meaning they have a fixed number of available shares and regulatory approval is needed before additional shares could be issued, unlike UITFs and mutual finds which are open-ended. Another difference is that ETFs are traded in stock exchanges whereas UITFs and mutual funds may only be sold back by investors to the issuing bank or financial institution; the implication is that whereas UITF and mutual fund unit/share prices only change daily, ETF prices change as they are traded, in real time.

Perhaps the most popular ETFs are index ETFs, be it stock or bond. A stock index ETF in Hong Kong, for example, would mimic the movement of Hong Kong's Hang Seng index by being invested in the component stocks of the index, much like equity UITFs and mutual funds. However, since index ETFs are not actively managed unlike comparable UITFs and mutual funds since the proportion of each stock in the fund is based on the composition of the underlying index and not determined by a professional fund manager, they are significantly cheaper; this is the main reason why we often hear investment gurus recommend index ETFs to investors. Finally, ETF investors earn as they do from stocks, from dividends and capital gains.

Real estate investment trusts

REITs are an important financial innovation in recent history. They give ordinary investors the ability to diversify into real estate-backed assets without having to shell out a huge amount of capital. Basically, a
REIT is pooled capital that is invested in income-generating real estate projects like commercial buildings or malls; investors participate by buying shares of the trust, which are also traded in stock exchanges, and also earn from dividends and capital gains.

While there also are investment funds like UITFs and mutual funds in countries like Singapore, ETFs and REITs often offer better and more inexpensive opportunities to diversify, so you might want to consider them first. A big portion of my capital here in Hong Kong is actually invested in a stock index ETF and a REIT, and I'm not worried a bit about these investments despite the global financial uncertainties we currently face. I'm not exactly sure how things are in Singapore, but as far as I know stocks are relatively cheap, in general, so it might be a good time to invest in a stock index ETF now; and I remember reading somewhere that the real estate market in Singapore is healthy especially compared Hong Kong's and China's, so it might be a good idea to buy some REIT shares as well (you have to do your own research about this first, of course). You may want to take a look at this previous post where I discuss specific investment alternatives in Singapore.

I hope you now have a better idea of what ETFs and REITs are, and are now hopefully confident enough to seriously consider investing in these assets. Good luck!

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