The best thing to arguably do with your money is to find ways to grow it passively through investments. Often, you hear that people tell you to spend less, save more and buy less lattes, but to tell you the truth, it’s impossible to grow wealth from purely saving alone.
This is where investing your money comes in.
The most accessible form of investing, where there’s no barrier to entry, no US$1 million minimum and no offshore accounts needed, are probably the Index Funds, Mutual Funds & ETFs. You may have invested some money in one of these, know a thing or two about them already, but it’s good to have a refresher every now and then.
Let’s get started on covering the basics of the index funds, and establishing its subtle differences with ETF.
Unlike actively managed funds, indexing relies on what the investment industry refers to as a passive investing strategy. Passive investments are not designed to outperform the market or a particular benchmark index.
The primary difference between an Index Fund & ETF are that Index Funds are basically mutual funds and ETFs are traded like stocks. The price at which you might buy or sell a mutual fund isn’t really a price—it’s the net asset value of the underlying securities.
Let’s break it down.
An index fund is a portfolio of stocks or bonds designed to mimic the composition and performance of a financial market index such as the Standard & Poor’s 500 Index (S&P 500), or the SET index fund, that mimics Thailand’s stock exchange.
The idea is that by mimicking the profile of the index—the stock market as a whole, or a broad segment of it, the fund will match its performance as well. Here are the basic characteristics of your typical Index Fund.
- It follows a passive investment strategy (a strategy that involves buying and holdings the assets for a long period of time rather than making frequent trades to beat the market)
- Index funds seek to match the risk and return of the market, following the theory that in the long-term the market will outperform any single investment.
- Managers of index funds trade holdings less often, incurring fewer transaction fees and commissions.
- In Thailand, you can buy index funds (like SET Index Fund) through selected asset management companies.
Ideal for: Entry level, risk averse investors who wish to track a popular index without betting too much.
- A mutual fund is basically like the entry level of funds. It’s a type of financial vehicle made up of a pool of money collected from investors to invest in securities like stocks, bonds, money market instruments, and other assets.
- Mutual funds take money from individual investors, put it in one pool and the fund manager uses the money to invest in different areas, strategies, or types. Just think, easy, peasy diversity first.
- Mutual funds come in different share classes with different fees and expenses. You just have to identify your risk appetite, your budget and generally what’s realistic for you.
- The key takeaway? Everyone who owns a share in a mutual fund gets the same mix of investments, whether that’s stocks or bonds. It’s all the same proportion.
- You can buy mutual funds through financial institutions, namely asset management companies in Thailand.
Ideal for: Risk averse investors who don’t want to pick their own stocks, and those who want “a bit of everything”
Exchange Traded Fund (ETF)
- ETFs are basically a twist on the good old mutual fund. It tracks multiple stocks/securities to let investors put money across sectors to regions.
- ETFs share traits to both mutual and index funds. The key differentiator? ETF shares trade throughout the day, just like regular stocks.
- Here’s an example: There are different types of ETF funds depending on their investment focus. For example, you may be interested in the cybersecurity sector but you’re not quite sure which to go for. Choosing an ETF fund allows you to have a blend of everything in that sector, giving you a diversified investment in that chosen niche.
- Investments in an ETF have two types of returns: Capital gains (because investors can trade an ETF like an ordinary stock, they can buy when it is at a low price and sell it at a high price to realize a profit), and Dividends (usually the fund manager will receive dividends from the stocks. The fund manager will then redistribute dividends to ETF holders after subtracting a transaction fee.)
- ETFs trade through online brokers and traditional broker-dealers in Thailand.
Ideal for: Investors who want to build a low cost, but diversified portfolio with a helping hand. For more experienced investors, they can actually use ETFs to build their own diversified portfolios, in a particular sector they are bullish on.
- Just like ETFs detailed above, Cryptocurrency ETFs are just that with a digital twist. The funds could track a single cryptocurrency or a basket of different digital tokens and currencies.
- In the US, the closest thing to a Cryptocurrency ETF is a fund known as the Bitcoin Investment Trust (GBTC). As cryptocurrency regulations are being more clearly defined in Europe and Asia, various markets have introduced cryptocurrency ETFs.
- The trust acts like an ETF in many ways—it owns bitcoins/ethereum on behalf of investors and allows them to trade in shares of the trust.
- GBTC is traded publicly on the OTCQX, an over-the-counter market, under the Alternative Reporting Standard for companies not required to register with the SEC.
- Similarly, there are a handful of institutional blockchain ETFs, like The Goldman Sachs Finance Reimagined ETF fund that tracks blockchain technology.
- Currently there are no cryptocurrency ETFs in Thailand.
Ideal For: Experienced Crypto-curious investors with some money to spare.
- An index fund has a broader definition referring to a portfolio of stocks or bonds designed to mimic the composition and performance of a financial market index.
- Mutual funds and ETF are different types of marketable securities. A mutual fund gives you a way to invest in a diverse mix of stocks, securities or bonds in a large pool. An ETF gives you exposure to a particular sector or region without committing to a particular company, and is traded daily.
- Whether you start to invest through an index fund, a mutual fund or pick a sector specific ETF, it’s all relatively accessible and sensible ways of growing your money. Just remember, identify your investment thesis, purpose and risk level.