Exchange Traded Funds (ETF)

There are two types of exchange traded fund (ETF).

a) An ETF that is invested in the shares that track the index
b) An ETF that is composed largely of deriviatives and have leverage.

You should invest in type (a), such as the STI ETF managed by StateStreet in SGX. This type of ETF is held by a trustee under the trust law.

You should avoid type (b), as it carries the risk that the issuer of this product may get insolvent, as has happend with Lehman Brothers.

Do not worry about the liquidity of the STI ETF. It is sufficient for ordinary investors, who wish to invest small sums of money for the long term and to withdraw small sums every one or two months for their expenditure. Liquidity is not an issue.

The STI ETF is NOT suitable for speculators who need the liquidity for trading. If you wish to trade, it is better to get a liquid stock.

If you are not sure about the structure of the ETF (i.e whether type a or b), you should ask the stockbroker or just stick to STI ETF (managed by State Street).

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