Introduction to Exchange Traded Funds (ETFs)
By investing in ETFs, you enjoy a cost-efficient and convenient way of investing in a single transaction to gain the exposure to a basket of securities represented in an index. The basket of securities could consist of either shares, bonds, commodities or others...
In the current world, the financial market nowadays has become increasingly complex. Many dinamic investment instruments are created to meet the diverse needs of the investors even the investor appetite. One od the most innovative instruments which is becoming increasingly is the Exchange Traded Fund(ETF). The following will be explains further about the ETFs and the benefits of investing in the funds.
WHAT is ETF ?
An ETF is a unit trust that is listed and traded on a stock exchange. It is an open-ended fund that tracks or replicates the performance of a benchmark index. Unlike the closed-ended fund which is a collective investment schemewith a limited number of shares and price completely determined by the valuation of the market. Based on the open-ended fund concepts, the ETF investors invest in a number of securities based on an index rather that just a single share or bond when they buy an ETF unit.
By investing in ETFs, you enjoy a cost-efficient and convenient was of investing in a single transaction to gain exposure to a basket of securities represented in an index. The basket of securities could consist of iether shares, bonds, commodities or others.
As ETFs are listed and traded on a stock exchange, you can buy or sell units of the ETFs on the stock exchange through any remisier, just like how you buy or sell the shares. You can use the same Central Depository System (CDS) account and share trading account - tha you use for trading shares - to trade ETFs. In Malaysia, a single trading lot of ETF consists of 100 units . This means you can buy or sell a minimum of 100 units of each lot.
Up to date, there are three ETFs listed on Bursa Malaysia, namely ABF Malaysia Bond Index Fund, FBM30etf (Managed by AmInvestment Bank Group) and MyETF DJ Islamic Market Malaysia Titans 25.
How Do ETFs tack an index ?
As ETFs are index-tracking funds, it is important to know what is an index and how do ETFs tarck an index.
An index is a "Basket" or portfolio consisting or either shares, bonds, other securities which are grouped to reflect the movement of an entire market. The securities that form an index are called index consitituents. The underlying securities of an index are choosen by the Index Provider to represent the broad market or sector. For example, Standard & Poor's is the Index Provider for the S&P 500 stock market index, which comprises 500 stock market capitalizations in the United States.
An ETF tracks an index by holding all securities in the same composition as teh underlying securities that make up the index. The fund could also hold a sample of securities that statistically represents the index to track it closely. Ths means ETF could invest in less number of securities as compared to the index, or a fraction of securities in the index.
With either tracking method, the bottom line of ETFs is to give returns that are very similar to teh performance of the index that the funds track. The funds do not seek for the outperform or underperform index. For instance, if the index increases by 10%, the price of the ETFs is likely to have an increase of 10%.
WHY invest in ETFs ?
Flexibility to buy and sell
Just like trading shares, you could buy or sell ETFs through your remisier or stock broker during trading hours or via online trading. You could check the price of ETFs throughout trading hours and enjoy the flexibility and price transparency when you trade ETFs. In Malaysia, the prices are available real-time thoughout the trading day on Bursa Malaysia's MASA feed. (MASA refer to "Maklumat Saham", a computerised display of real-time price.
Low Cost Investment
Generally, the transaction costs of ETFs are lower than those of a unit trusts. As an ETF investor, you do not need to payany entry fee. You also pay lower management fees because the funds are passively-managed funds. The annual management fees for ETFs are generally below 1%. For example, the annual managemnt fee for ABF Malaysia Bond Index Fund is 0.10% of net assets value (NAV) of the fund and FBM30etf has an annual management fee of 0.50% of the NAV of the fund. The low fees provide you a cost-efficient investing method to access a portfolio of divesified securities through a single transaction.
Efficient Way to Divesify
By investing in ETFs, you could divesify your investment because the funds invest in a basket of securities rather than a suingle securities. Hence, the risk has been minimize and investing in ETFs allows you to have instant diversification in the index portfolio. You cpould also gain access to markets that are not easily available such as emerging markets by investing in an ETF that concentrates on emerging marlets. For example, if you want to invest in share listed in India, you can buy ETFs that track the MSCI India index.
Convenience
It is convenient to invest in ETFs because you get immediate exposure to the underlying securities representing an assets class in an index by just making a single transaction. usually, it is more expensive for you to buy a large number of individual shares to track the index, and to spend on the trading cost for each transaction. For instance, if you invest in FBM30etf, you are exposed to 30 largest listed companies (based on market capitalisation) in Malaysia though a single transaction. It is more cost-efficient for you as you need not invest in the 30 companies individually.
Conclusion
In Conclusion, ETFs are suitable for the investor who are looking for alternative investment avenue that allows them to buy or sell units anytime during trading hours. ETFs also enable you to have diversificationin your investment portfolio with exposure to a specific index in a single trade rather than having to buy individual shares.
