An exchange-traded fund, or ETF, is a collection of various assets such as stocks, bonds, commodities, or currencies. Investors have the opportunity to purchase a share of this collection, similar to buying shares of a company.

Investing in ETFS allows you to access a wide range of assets simultaneously, providing the diversification advantages of mutual funds while offering the convenience of trading stocks. Investors can trade the ETF on an exchange, similar to how stocks are traded, and ETFs typically have lower fees compared to other funds.

Let’s have a look at why you should invest in ETFs and what the current trend is in the Kenyan ETF market.

Why should you invest in ETFs?

If you want to invest in stocks but lack the time and research capabilities to select the right ones for your portfolio, ETFs can be a valuable option. ETFs make it much easier for you to participate in the stock market compared to investing in individual stocks. They provide a wider range of investment options at a more affordable price compared to investing directly in stocks.

Firstly, ETFs simplify portfolio diversification without stock or bond selection. A single ETF trade involves hundreds or thousands of stocks. This lets investors diversify across industries. With a click, an ETF gives your portfolio the benefits of a particular asset basket without the cost or hassle of buying all its components.

Secondly, ETFs are cost-effective. Every time you bought all 500 S&P 500 stocks, your broker would charge a commission. These fees can easily build up and hurt your return! ETFs let you buy 500 shares at once and pay one brokerage charge, lowering the cost of diversifying your portfolio.

Thirdly, most ETFs only incur capital gains taxes when you decide to sell the investment. This means you’ll pay less tax on your ETF investment overall.

Navigating Kenya’s ETF market

Investing in ETFs in Kenya can have a wide range of assets they can be created from, making it possible for investors to purchase an ETF that tracks the Brazilian or Japanese stock markets or commodities like maize, crude oil, or gold.

ETFs are exchange-tradable and are not classified as derivatives. When an investor in Kenya buys units of an ETF, they are actually purchasing the assets listed in the fund's charter, not contracts based on those assets.

Kenya stands out as a highly sought-after investment hub in East Africa, with private equity funds playing a significant role in attracting capital inflows to various sectors. Private equity returns outperform local government securities with a median internal rate of return of 20 percent.

ETFs have gained significant popularity worldwide, and it's clear that they can serve as an effective framework for introducing exotic securities onto an exchange.

Investing in ETFs in Kenya is done by a wide variety of investors to build a portfolio or gain exposure to specific sectors. They are like stocks in the way they trade but can also be compared to more broad investments.