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In this article, we’ll discuss ETFs and how to invest in them. But first, let’s explain what an ETF is, and go over some facts about this asset type.
What is an ETF?
An ETF—that is, an Exchange Traded Fund –is an investment fund that is a composite of stocks, bonds, or commodities that can be bought or sold on an exchange, just like a stock. As a result, they track the prices of the industries, asset types, or markets that their underlying assets represent. For example, gold ETFs may track the price of gold across a commodities market. And a banking ETF would do the same for the stocks of companies in the banking industry. So, they give you a sense of where segments of the financial market are at a particular time, price-wise.Types of ETFs
These are some types of ETFs you may hear about or find:- Industry or Sector ETF: This is a “basket” of stocks from a specific sector or industry. They provide investors with exposure to a diverse collection of companies in a particular part of the economy. Examples include Vetiva Industrial ETF (comprising the top 10 companies in the industrial sector listed in the Nigerian Stock Exchange) and the Vanguard Information Technology ETF (for the tech sector, listed on the US markets).
- Bond ETF: This is an ETF with bonds as its underlying assets. Those bonds may be issued by the government or corporations. Some ETFs in this category are the Fidelity Total Bond ETF (US markets) and the Vetiva S&P Sovereign Bond ETF (Nigeria).
- Commodity ETF: A commodity ETF allows you to invest in a commodity without physically possessing that commodity. The NewGold ETF is a Nigerian ETF that tracks the price of gold. The Franklin Responsibly Sourced Gold ETF is a similar ETF domiciled in the US.
Advantages of Investing in ETFs
Here are some reasons you should consider investing in ETFs:- Allows you to target whole industries or sectors
- You can buy and sell them at any time, just like stocks
- You can reduce volatility and risk via diversification
- Often more suitable for beginner investors than single stocks or commodities
How to Invest in ETFs
The following are steps you can take to invest in ETFs, even as a regular Nigerian:Educate Yourself about How ETFs Work
You don’t have to get into the deep technicalities of ETFs to ready yourself for an ETF purchase. But you do need to understand the basics of this asset type. Thankfully, we have covered some of that here. The price of an ETF at any given time reflects the average of market valuations for the stocks, bonds or commodities of which it is comprised. Investors will typically purchase ETFs that have a good potential for price appreciation.Research Specific ETFs
Having gained a grasp of the basics of ETFs in general, your next step should be to research the various forms of this asset type available to you. As we have said, they may represent industries, stock markets, bonds, or commodities. Consider the more popular ones first, especially those with a track record of delivering consistent returns. And think about the long-term prospects for the businesses and the items underlying them. If they’re positive, then the ETF is likely a solid pick. Note: Avoid ETFs with low liquidity or low trading volumes. For the United States, some experts advise skipping ETFs with less than $100 million in assets.Decide How Much Money to Invest
You probably can’t throw all your money into ETFs, so you must determine how much of it you’re going to invest. Just remember to have an emergency fund saved up for unforeseen future needs first. Ideally, that would be worth between 3 and 6 months of expenses. If you already have that set aside and there’s yet money to spare, you may think about what portion of it you’d like to invest in ETFs. You will also have to choose between a one-time investment and something you continually contribute to over time.Open an Investment Account
Your approach to this depends on your budget, where the ETFs are domiciled, and whether you prefer traditional brokerages to retail investment platforms. Most first-time investors commit relatively small amounts and may not qualify to use larger professional brokerage firms. They could opt for digital platforms like Chaka, Bamboo or Trove, where they can purchase and sell ETFs domiciled in Nigeria or the United States. Regardless of the type of account you choose, you will have to provide documentation that proves your identity, location, and links to the Nigerian financial system, as part of the signup process.Select and Order an ETF
After opening an investment account, you can purchase any ETFs you’ve decided are suitable for you. Remember that the price of assets like this fluctuates in the short term. But you shouldn’t panic if your investment is a good one. In the long run, the value of your holdings will rise by a lot.Register to attend the CN Business Mixer
Final Words
This article has explained investing in ETFs. As we’ve noted, they are a great place to start for beginner investors. If you are interested in specific ETFs, you’ll find information about them from their fund managers (they are usually accessible online).Featured Image Source: Appreciate Trading
Got a suggestion? Contact us: editor@connectnigeria.com
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