Exchange-traded funds (ETFs) offer traders and investors a practical and affordable means of diversifying their portfolios and gaining exposure to a variety of assets in a single trade. Exchanges trade ETFs as a basket of linked assets.
Although investing in the financial markets might be intimidating, ETFs provide an easy way to overcome this difficulty. Shares of this type of investment, traded on stock exchanges, hold assets like stocks, commodities, or futures. Investors can purchase and sell ETFs at a discount and at any time during trading hours.
ETFs in Kenya offer a diverse selection of assets for investors to choose from. This allows investors in Kenya to easily access ETFs that track various international stock markets or commodities such as maize, crude oil, or gold. ETFs are exchange-tradable, unlike unit trusts, which are not. ETFs are not considered derivatives. When an investor purchases units of an ETF, they are buying a security that is backed by the actual assets specified by the fund’s charter, rather than contracts based on those assets.
Kenya has emerged as a highly sought-after investment destination in East Africa, with private equity funds playing a significant role in attracting capital inflows to various sectors. Private equity returns far exceed those of local government securities, with a median internal rate of return (IRR) of 20 percent.
Types of ETFs
Here are the most common types of ETFs:
Equity ETFs invest in a basket of stocks representing a specific market index or sector.
Currency ETFs monitor the fluctuations of foreign currencies in relation to the investor’s domestic currency. Investors have the option to utilise currency ETFs in order to protect themselves from currency risk or to potentially profit from currency fluctuations.
Investing in bond ETFs allows you to access a wide range of fixed-income securities, including government bonds, corporate bonds, municipal bonds, and more. Investors can utilise bond ETFs to focus on specific segments of the fixed-income market, as these ETFs can differ in credit quality, maturity, and duration.
Smart Beta ETFs utilise alternative index construction methodologies, typically centred around specific factors such as value, growth, momentum, or low volatility. These ETFs strive to outperform traditional market-cap-weighted indexes through the application of targeted investment strategies.
Commodity ETFs closely follow the performance of physical commodities such as gold, silver, oil, natural gas, or agricultural products. Investing in commodity ETFs offers a convenient way to gain exposure to various commodities without the need to purchase and store them physically.
Sector ETFs concentrate on specific sectors of the economy, such as technology, healthcare, financials, or consumer discretionary. If you’re interested in adjusting your portfolio to align with your market outlook, sector ETFs can be a valuable tool.
Inverse ETFs seek to provide a performance that is the opposite of a specific index or asset. These can be utilised to protect against market downturns or capitalise on declining markets. Although they have the potential for greater gains, they also come with increased risks and are usually intended for short-term trading.
International and global ETFs offer investors the opportunity to diversify their portfolios by gaining exposure to foreign markets and companies beyond their own country. These ETFs offer coverage for specific regions like Europe, Asia, or emerging markets, providing comprehensive global exposure.
List of top traded ETFs
Here’s a list of some of the most popular and frequently traded global ETFs in Kenya, along with their ticker symbols:
- SPDR S&P 500 ETF Trust (SPY)
- Invesco QQQ Trust (QQQ)
- iShares MSCI Emerging Markets ETF (EEM)
- Vanguard Total Stock Market ETF (VTI)
- iShares Core US Aggregate Bond ETF (AGG)
- Vanguard FTSE Developed Markets ETF (VEA)
- iShares Russell 2000 ETF (IWM)
- Financial Select Sector SPDR Fund (XLF)
