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Is it possible to manage ETFs passively?

Kristian Leroy Avatar

Exchange-traded funds (ETFs) have become a popular choice of investment for many investors around the world. ETFs allow diverse and cost-effective market exposure, giving access to asset classes and sectors with lower transaction costs than buying multiple stocks or mutual funds. However, managing ETFs actively can involve some effort from investors as they need to monitor the portfolio’s performance and make adjustments when necessary. With that in mind, is it possible to manage ETFs passively in Singapore? It is possible – but only if specific steps are taken by investors beforehand.

How to passively manage ETFs in Singapore

Passively managing ETFs means taking a hands-off approach and minimising the time taken to make trading decisions. Traders can do this by setting up a portfolio of ETFs with the appropriate asset allocation and then adjusting it over time.

Choose an appropriate ETF

The first step to passive ETF management is to select an appropriate ETF. Investors should compare fees and expenses, as fees can substantially reduce returns over time by eroding the value of their investment. Investors should also research the fund’s portfolio composition to ensure that it corresponds with their desired asset allocation and risk tolerance. Lastly, investors should consider the trading liquidity of the ETF before investing.

Find a broker

Once investors have identified an ETF that fits their criteria, they should find an ETF broker in Singapore to assist them with ETF management. ETF investing requires a broker as they are traded on stock exchanges and cannot be purchased directly from the fund manager. An ETF broker can advise selecting ETFs and executing trades at competitive prices.

Select a strategy

The third step is for investors to select a passive investment strategy for the ETF portfolio. ETFs come with two main strategies – market trading or buy-and-hold. Market trading involves researching markets, selling ETFs when the price is high and buying back when it’s low, while buy-and-hold involves simply buying ETFs and holding onto them until the price increases.

Rebalance regularly

Having selected a strategy, investors should set up an investment plan and regularly rebalance the ETF portfolio to ensure it remains aligned with their objectives. Rebalancing is essential as market fluctuations can cause some asset classes to make up a more significant portion of the portfolio than intended, thus leading to higher risk for lower expected returns.

Monitor performance

Investors should regularly monitor the performance of their ETF portfolio. While passive investing minimises costs and simplifies management, it does not eliminate the need for monitoring performance. Regular monitoring can help investors stay informed about changes in the market and adjust their holdings accordingly.

Advantages of passively managing ETFs

There are some advantages to passively managing ETFs. These will help traders weigh the pros and cons of passively managing ETFs. However, traders must also consider the risks before managing their ETFs passively.

Cost savings

Investors can save on costs associated with actively trading the funds by passively managing ETFs. ETFs typically come with lower management fees than other investments and do not incur commissions or sales charges when buying or selling.

Time efficiency

Passive ETF management also requires less time and effort than actively managing the portfolio. Investors can focus more on long-term goals instead of short-term trades by eliminating the need to constantly research and track markets.

Professional management

Passive ETF management allows investors to benefit from the expertise of professional fund managers without incurring additional costs. These managers will select the best ETFs and rebalance them according to predetermined goals, allowing investors to achieve their long-term financial objectives.

What are the risks?

Though there are several risks to passively managing ETFs, investors must weigh the pros and cons of this investment strategy before deciding whether it is best for them. Awareness of the risks allows investors to make informed decisions and help them manage their portfolios more effectively.

Lack of control

Passive ETF management relinquishes much of the control over the portfolio to the fund manager. Therefore, investors can be exposed to a more significant amount of risk than they would with an actively managed portfolio, as they cannot adjust their holdings according to market conditions.

Underperformance

Passive ETF management does not allow for active trading, leading to underperformance if the benchmark portfolio fails to outperform the market because investors cannot take advantage of short-term market phenomena or capitalise on buying opportunities.

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