An Exchange Traded Fund (ETF) is an investment vehicle that tracks an index, a basket of assets, or a commodity, but trades like regular shares on a stock exchange.
ETFs will trade on the Exchange Traded Funds Board of the Nigerian Stock Exchange.
Why invest in ETFs?
Low Cost – ETFs are less expensive to operate than actively managed funds because they (ETFs) have less frequent portfolio changes.
Transparent – The performance and portfolio composition of an ETF reflect the underlying index or commodity, as the holdings of an ETF closely mirror the underlying index or commodity it tracks.
Investment Diversification – An ETF is a direct and inexpensive way to attain diversified exposure to an index, commodity, sector, or region, while remaining in the capital market.
Tradability – Investors can buy and sell ETFs like shares through a stockbroker. ETFs can be bought and sold on the Nigerian Stock
Exchange throughout the day based on market prices, which are determined by demand and supply
Some Advantages of ETFs
I. ETFs provide a cost effective way of trading a basket of shares through a single transaction.
II. ETFs offer a market related performance or return.
III. Allows for diversified exposure through buying a single share
IV. Provides an opportunity for investors to track a market.
Some Disadvantages of ETFs
I. ETF prices are determined by market forces, so a buyer might buy at a slight premium or discount versus the Net Asset Value (NAV).
II. Some ETFs may not track widely accepted indices, which sometimes result in higher costs and higher risks.
Risks associated with ETFs
I. This includes general market risks, interest rate risks, liquidity risks, inflationary risks, and legal and regulatory risks.
II. An investment in ETFs may increase or decrease in value as the market changes.
Exchange Traded Funds vs. Mutual Funds
I. No minimum investment, minimum holding period, or early withdrawal fees are associated with ETFs, but Mutual Funds usually have a minimum investments and minimum holding periods.
II. ETFs trade like regular shares and can be bought or sold throughout the trading day by placing an order with your stockbroker. Mutual funds, on the other hand are usually bought or sold based on closing prices for the day, and the transaction occurs between the investor and the fund.
III. ETFs generally have lower expense ratios than mutual funds. Most ETFs passively track an index without significant manager intervention, unlike many mutual funds that are more actively managed by investment managers. As a result, ETFs tend to have lower expense ratios than mutual funds.
Exchange Traded Funds vs. Closed-End Funds
I. The price of an ETF trades very close to its Net Asset Value (NAV), while that of a closed-end fund is completely determined by valuation of the market.
II. The structure of ETFs allow market participants to redeem shares from the basket of the fund’s underlying assets, while closed-end funds can only be redeemed upon liquidation of the fund
Clearing and Settlement cycle is T+3, and there are no circuit breakers or price band limits.