New To ETFs
1. What is an ETF?
An Exchange Traded Fund ("ETF") is an open-ended investment fund with no expiry date listed and traded on a stock exchange. Investors can buy or sell ETFs through their remisier or trade via online during trading hours. An ETF is designed to track or follow an index's performance.
2. What is an index?
An index is made up of a basket of securities (e.g. bonds, commodities, equities) that shows the movement or change in a specific securities market.
3. What are the advantages of ETFs?
ETFs combine the benefits of stocks, unit trusts and index funds because they share common characteristics:
- Easy access to diversification - own a basket of securities e.g. an entire market, country or region with a single trade
- Flexibility - buy and sell during trading hours just like a stock
- Low cost - cost of investing (lower management fee and no upfront fee) is generally lower because it follows the performance of the index
- Transparency - you know what you are buying as the underlying securities are disclosed. Prices are available real-time throughout the trading day.
- Liquidity - The investor can redeem units easily and obtain cash by the 2nd business/market day after trade date (T+2).
- Affordability - For a small sum of money, you can invest in your desired securities investment.
4. What should I do before investing in an ETF?
It is best if you understand:
- Investment objective and strategy of the ETF
- Information on the index that the ETF is tracking
- Fees and charges that will be borne by an investor
- Trading information of the ETF
- Income distribution policy
- Information on the management company
5. How do I buy ETFs?
It's easy to buy and sell ETFs through your remisier or any stock broking company just like how you trade stocks anytime during normal trading hours.
6. What do I have to pay when buying and selling ETFs?
Just like buying and selling stocks, you need to pay brokerage commission, stamp duty and clearing fees.
7. What determines the price of an ETF?
ETF's price is based on its Net Asset Value (NAV) whereby it is the market value of the underlying securities plus any net income not distributed. The market price of an ETF is generally very close to the NAV. However, the price of an ETF can be affected by demand and supply in the market.
8. What returns can I expect from an ETF?
Generally, investment returns corresponds to the performance of the index that it tracks. If the index goes up by 10%, the fund returns should be about 10%.
9. Do ETFs provide income distribution?
Most ETFs distribute income to their holders either annually or semi-annually. You are advised to look at the distribution policy in the prospectus of the ETF.
10. What are the risks of investing in ETFs?
The risks of investing include:
- Market Risk - Performance of an ETF will be directly affected by the performance of the underlying market in which the ETF invests in.
- Tracking Error - The performance of the ETF may not be able to follow closely to the performance of the index due to failure of the trading strategy, fees and expenses etc
- The units may trade at a discount or premium against the NAV of the fund, subject to the demand and supply of the units.
11. How are ETFs different from stocks and unit trust?
The differences can be summarized as follows:
No
|
Instruments |
ETFs |
Stocks |
Unit Trusts
(Equity Funds) |
1 |
Diversification
|
|
× |
|
2 |
Fees and Charges |
| |
Entry Charge
|
×
Brokerage fees apply*
|
×
Brokerage fees apply*
|
Up to 6% of NAV per unit***
|
| |
Management fees
|
0.5%
|
×
|
1.5%-2% per annum***
|
3 |
Tradability |
| |
Intra-day Pricing
|
|
|
×
|
| |
Cash settlement
|
T+2**
|
T+2**
|
Upfront
|
|
*Please note brokerage fee of up to 0.70%, clearing fee of 0.03% and stamp duty are applicable when trading securities on Bursa Malaysia.
** T+2 means second business day after trade date
***Source: Lipper, Refinitiv and AmFunds Management Berhad, 28 February 2020
12. Why introduce ETFs to Malaysia?
Over the last two decades, ETFs have grown at a tremendous pace around the world since it was first introduced in the United States in 1993. ETFs are increasingly seen as a viable investment opportunity especially now when investors are increasingly concerned about transparency, liquidity and counterparty risk. ETFs are suitable for institutional and retail investors alike as an alternative to conventional investment products.
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