[Derivative Products ABC] What to Watch Out for When Investing in ETFs?

[Asia Economy Reporter Jihwan Park] An ETF (Exchange Traded Fund) is a product that lists an index fund on an exchange, allowing investors to conveniently trade it like stocks.

The main feature is that investors can obtain the returns of a specific index. It allows diverse investments not only in domestic stocks and bonds such as KOSPI and KOSDAQ but also in overseas stocks from the US, China, Europe, as well as in dollars, gold, crude oil, and energy.

Investors do not have to go through the trouble of selecting individual stocks like with fund investments, and they can buy or sell at their desired price anytime in the market. In other words, it is easy to think of an ETF as a combination of an index fund and stocks.

Since ETFs are products traded in the stock investment market, investment risks are involved. The biggest risk factor is the possibility of a decline in the price of the underlying assets. If the underlying index falls, principal loss occurs. However, because ETFs invest in a diversified set of index components, they can spread the unique risks of individual companies more than investing in single company stocks. The risk of index decline due to overall market fluctuations cannot be avoided.

Also, since ETFs are funds, basic fees are incurred, and brokerage commissions must be paid when trading through securities firms. The management fee for ETFs is relatively low, ranging from 0.1% to 0.5%, which is cheaper than funds with fees around 2%.

Because ETFs are traded in the same way as stocks, investors must bear trading commissions separately from management fees, which can be a burden. Therefore, frequent short-term trading has the disadvantage of increased transaction costs. This is why it is necessary to thoroughly review investment patterns and strategies in advance before investing.