Exchange-traded funds (ETFs) have become a popular way for investors to gain exposure to different assets and markets. This introduction will explain what ETFs are, the benefits of ETFs, the types of ETFs, and how Kenyans can invest in ETFs.
What is an ETF?
An ETF is a collection of securities such as stocks or bonds that is traded on a stock exchange just like a regular stock. ETFs offer investors an easy way to gain instant diversification and access many different markets and assets.
ETFs track underlying indexes, commodities, bonds, baskets of assets, or other securities. They allow exposure to markets and assets that would otherwise be difficult for individual investors to access directly. The prices of ETFs fluctuate throughout the trading day as they are bought and sold.
Benefits of ETFs
There are many advantages ETFs offer investors:
- Cost – ETFs have low expense ratios, making them more affordable than actively managed mutual funds. The trading costs are also low.
- Diversification – ETFs provide instant diversification across industries, markets, geographies and asset classes.
- Liquidity – ETF shares can be traded at any time during market hours at continuously updated prices. This makes them highly liquid.
- Tax Efficiency – ETFs generate relatively low capital gains because the underlying assets are infrequently traded.
- Flexibility – ETFs can be bought and sold much like stocks, and there are many ETF options to match needs.
- Transparency – Unlike mutual funds, the holdings of ETFs are transparent daily.
Types of ETFs
Here are some of the most common types of ETFs available:
- Stock ETFs – Track indexes like the S&P 500 or industry sector indexes. Allow exposure to the overall stock market or specific sectors.
- Bond ETFs – Provide exposure to different segments of the bond market like government, corporate, or junk bonds.
- Commodity ETFs – Give exposure to commodities like precious metals, oil, natural gas or livestock.
- Currency ETFs – Track the value of foreign currencies so investors can diversify into forex assets.
- Real Estate ETFs – Allow investments into real estate without buying physical properties.
- Dividend ETFs – Invest in stocks with high dividend yields.
- Thematic ETFs – Focus on specific investment themes like robotics, cannabis, or environmentally friendly companies.
How Kenyans Can Invest in ETFs
Kenyans have several options for gaining exposure to ETFs:
- Local ETFs – A few ETFs trade on the Nairobi Securities Exchange including the NewGold ETF tracking gold prices. But the selection is still limited.
- Global Brokers – Kenyans can open international brokerage accounts that provide access to ETFs in markets like the U.S. Fees and minimums apply.
- Mobile Trading Apps – Apps like Rise Fund allow Kenyans to invest in fractional shares of U.S. stocks and ETFs starting from just $1.
- Retirement Accounts – Some Kenyan retirement schemes and pension plans allow the inclusion of ETFs in the investment portfolio options.
- Mutual Funds/Unit Trusts – There are Kenyan mutual funds that invest in ETFs internationally so investors get indirect exposure.
- Equity Investment Banks – I-Invest and other platforms from investment banks allow the purchase of overseas ETFs.
Choosing ETFs
Here are some tips for Kenyans to choose appropriate ETFs for their investment goals:
- Decide on an asset class or market segment to target. Study how the fund tracks underlying assets.
- Look for ETFs with lower expense ratios, high assets under management, and robust daily trading volumes.
- Understand the index methodology for index ETFs. Evaluate the fund holdings and investment strategy.
- Research the ETF provider/manager’s reputation, history, and transparency.
- Review historical returns over various periods and compare them to benchmarks.
- Evaluate risks like foreign currency exposure, political risks in target markets, and concentration risks.
Diversification is key. Most advisors suggest investing in a basket of ETFs across asset classes, geographies, market capitalization, and industries. Rebalancing periodically helps maintain target allocations.
Conclusion
ETFs offer Kenyan investors an efficient, flexible and cost-effective way to build a diversified portfolio. With the variety of global ETF choices through international brokerages, mobile apps and local platforms, Kenyans can access assets and markets that previously seemed out of reach. Investing requires research and understanding risks, but ETFs open up new opportunities.
