Investing through the ETF

Dear Mr. Tan,

I read your blog about investing in the STI ETF. Can I ask you the following questions?

1. What is the difference between investing in a unit trust and an ETF?

Reply: When you buy or sell a unit trust, the price is based on the Net Asset Value at the end of the day, plus a spread (if applicable). If buy buy or sell a ETF, the price is based on the actual price that has been traded. You need to offer an attractive price that the other party is willing to trade with you.

2. The liquidity for the ETF is low. The difference between the buy and sell price is high. What price should I buy? Will there be someone else willing to transact with me at my price?

Reply: You should offer a price between the buy and sell price quoted in the exchange. For example, if the prices are 3.00 and 3.08, you should offer a price at 3.04. If you keen to buy, you can offer 3.05. Similarly, if you are keen to sell, you can offer 3.03. You may be able to find another party willing to trade with you at that price. This will help to create the interest and liquidity in the market.