Saturday, August 21, 2010

Investment: The Risk of Investing in ETFs in Singapore

In one of my previous blog entries, I had mentioned about the risk of investing in Exchange Traded Funds (ETFs).  At that time, the major risk mentioned was the counter party risk, as some of the ETFs don't hold the real underlining stocks.  Instead, they only hold derivatives of the underlining stocks.  If a counter party defaults, or fails, then there is a risk to the ETF.

The risk I am talking about today is about the specific risk of investing in ETFs in Singapore.  In the past few years, SGX had introduced quite a number of ETFs tracking different markets to Singapore investors.  This is for sure, a good thing.  Investors have more choices and options available to them.  However, you must remember Singapore is a small country with a small population.  The popularity of ETFs is catching up, but the volume may not be there.  For some of the more popular ETFs, such as STI ETF, the trading volume is still ok.  At least there are a few thousand shares changing hands each day.  However, for some less popular ETFs, this may not be the case.  Some ETFs may have 0 volume for a few days!  For example, the db XT MSCI Emerging Market ETF 10, has 0 volume for almost a week.  In other words, the counter is illiquid.  Investors holding such ETFs will suffer substantial losses if there is a sudden drop in the ETF and there is little volume in the market.

If you invest in something you don't know, then that investment is high risk!

Happy investing!

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