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Investing in Exchange Traded Funds

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Investors fInvesting in Exchange Traded Fundslee Wall Street, seek shelter in bond and gold

By Lilian Olubi, CEO, EFG Hermes Nigeria

And what a season it has been!

Since our last write-up, so much has happened across markets globally and of course, ours has not been an exemption. Notwithstanding the significant consequences of the Coronavirus (COVID-19) pandemic on the financial markets, I maintain that it is important that discerning investors continue to position their portfolios across promising asset classes or at least seek knowledge about them in order to maximize their earning potential as the cycles alternate.

Today, we continue the series on capital market investment options, talking about the Exchange Traded Funds (ETF’s)

Exchange-Traded Funds (ETFs) are securities that track the performance of an index or basket of assets. They are listed on an exchange and trade much like stocks.

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ETFs derive their performance from the index or underlying assets they track. Currently, we have about ten ETFs listed on the bourse of the Nigerian Stock Exchange with different underlying assets.

A notable advantage of ETFs is that they provide investors with the opportunity to diversify their investments. Investors in ETFs are exposed to a series of investment strategies and asset classes that could include local fixed income securities, local equities, international markets, currencies commodities and suchlike.

ETFs are often packaged and managed by professionals who are conversant with the products and market volatilities in order to minimize the risks embedded in such investments.

There are different categories of people who invest in ETFs as discussed below:

The first set are investors who are looking for diversification through investments in certain securities. One needs to remember that ETFs could comprise of a basket of various asset classes with different individual characteristics.

A major advantage of this is that it ultimately minimizes risk and thereby maximizes returns on investments to such investors. Investment in only one asset class has been proven to be highly risky and this could lead to a huge loss or depletion of capital invested in some cases.

ETFs have succeeded in helping individuals to achieve this specific investment objective. It also provides a balanced combination of assets that could give maximum returns on investments (ROI)

Another set of beneficiaries of ETFs are passive investors who for one reason or the other may not have enough time to actively monitor the market. They can therefore be rest assured that they could enjoy most benefits in the market by their investment in ETFs.

They would engage a competent professional who can select the relevant asset pool with complementing features to bring about maximum profitability.

For the more adventurous investors, ETFs can be a tailored made opportunity for the actualization of their quest. Some ETFs comprise a basket of both local and foreign based assets. This, therefore, provides such avenues for entering into foreign markets at ease and in a relatively cheaper manner.

ETFs are also beneficial for such investors who have an eye for benchmark returns at a minimal cost. Some ETFs can be used to benchmark a particular sector, while some can be used to mirror a category of asset classes.

Another set of ETFs can be tailored to benchmark the market Index, in which case, an investor stands to benefit from the performance of such asset classes at a minimal cost. This also gives the investor the ownership and performance of all stocks/securities that are contained in such basket.

How do we invest in ETFs?

Like every other investment in both money and capital markets, it’s important for an investor to engage a financial professional who will interrogate your objectives, risk appetite and style,  guide you through the product options and assist you in setting up the required account.

It is also important to note that the liquidity for ETFs is a function of the underlying securities. You can buy the units of ETFs in line with the prescribed format by the managers and you can dispose of your investment whenever you wish in line with the policies that guide such at any point in time.

The Nigerian Stock Exchange which is a multi-asset exchange has made a considerable effort over the years in broadening its product range and its important that investors are aware of this and tap into the varied opportunities that the market offers.

As we look ahead in quite uncertain times, we must not remain aloof but keep a keen eye on moving trends and opportunities.

Wishing you good success and until next time, stay safe!

VANGUARD

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