Exchange-Traded Funds (ETFs) are investment funds that hold a collection of assets such as commodities like precious metals, real estate, stocks and bonds. ETFs are traded in the stock markets just like normal stocks. The main ETF issuer in Kenya is the Nairobi Securities Exchange (NSE). The ETFs are unpredictable kinds of investments since they fluctuate throughout the day just like individual stocks. ETF investors buy diversified asset portfolios and can be local or global. The investors gain through the performance of all the assets in the fund. As a result, the investor gains from different assets without investing in each asset individually. Diversification of portfolios is important to manage investment risks while maximizing returns. If one asset performs poorly, the losses can be offset by the good performance of other assets reducing risk and volatility of the portfolio.
ETFs allow investors to achieve a wide market exposure with a single investment. For instance, an ETF tracking the Nairobi Securities Exchange (NSE) exposes investors to multiple companies listed on the exchange. This exposure lets investors also diversify their investments to different industries such as banking, energy and telecommunication without having to purchase different individual stocks. Investors can also choose to invest in specific sectors, especially those that are growing. For instance, an investor may choose to invest in telecommunications as a sector and invest in multiple telecommunication companies.
ETFs provide exposure for investors in the global markets. The Kenyan stock market being relatively smaller than the global stock market, investors can diversify their portfolios beyond Kenya reducing the risk that ties their investments to the performance of the local economy.
ETFs are also more affordable compared to actively managed funds. It is mainly favourable for investors looking for low fee investments. ETFs offer flexibility and transparency since they are traded during market hours and also because they are traded on stock exchanges. ETF investments are safe since in Kenya they are regulated by the Nairobi Stock Exchange (NSE) and Capital Markets Authority (CMA). ETFs are exempted from capital gains tax.
