The financial world has significantly changed during the last decade. One of Malaysia’s most innovative finance trends is Exchange-Traded Funds (ETFs). ETFs are almost similar to a unit trust. While unit trusts are managed by a fund manager who looks into specific stocks or investments based on the trust instrument, ETFs are typically addressed to track an index.
ETF combines index funds and stocks’ features, allowing investors to manage their investments in many different assets. How do ETFs work, and why have they become a great value to your portfolio? Also, how can we invest in Exchange-Traded Funds?
What is an ETF?
ETF is an open-ended investment fund listed and traded on the stock exchange. As one of the most valuable investment instruments, Exchange-Traded Funds or ETFs are accessible on Bursa Malaysia. Currently, there are 20 ETFs listed in Bursa Malaysia. Since ETFs are classified as stocks, investors can buy as many ETFs as they want, just like foreign stock markets and gold. Investors will gain money from ETFs through capital appreciation and dividends.
ETFs have several types that differ in asset class, geography, or investment approach. They are Equity, Leveraged, Inverse, Fixed Income, and Commodity ETFs. Each consists of a group of stocks, bonds, futures, and/or commodities based on an index that offers broad diversification.
As investors, you should be confident that your instrument is worth buying. ETFs have benefits that draw investors to consider them part of their portfolios. The reasons are:
- Diversified exposure
ETFs allow investors to invest in many assets at once with low capital. ETFs are more like an investment basket of shares, bonds, futures, or commodities. By doing this, investors find it more secure since they can choose where their money goes.
ETF fees are relatively small, between 0.08% and 1.09% a year. Compared to a unit trust, ETFs become more economical to buy and maintain in the long run.
ETFs are considered stocks. Listed on the Main Market of Bursa Malaysia, you can easily buy and sell your ETFs. The trades are available through stock brokers and online.
By visiting the website, investors will know which underlying assets or stocks are held in their ETFs. It allows users to measure which asset would be better for their portfolio.
The market price for ETF is tied to the Net Asset Value (NAV). However, an ETF’s trading price also depends on demand and supply. If people are more interested in buying ETF than selling it, you can see that the price is increasing.
Another point of difference is the cost of investment. Investors may need to pay a clearing fee, brokerage fee, and stamp duty akin to shares trading. An annual management fee is usually under 1% of the fund’s NAV. On the other hand, Unit Trusts often impose up to 5.5% of the upfront sales fee. It may impose an annual management fee of up to 5% per annum of the fund’s NAV.
To have an ETF as a part of your portfolio, you must have a Central Depository System (CDS) account and be maintained by a broker, just like stock trading. Looking through the benefits and how it works for the investors, ETF should match your risk appetite and align with your financial goal, whether you are investing for capital gains or dividends.