If you’re looking to invest your hard-earned money, then it’s important to have a well-diversified investment portfolio. Investing in a single stock or asset class can be risky, as it exposes you to concentration risk and company-specific risks. That’s why many investors turn to exchange-traded funds (ETFs) as a way to diversify their portfolios, minimizing investment risks to achieve their long-term financial goals.
According to Bursa Malaysia, ETFs have become increasingly popular globally since they were first introduced in the early 1990s. The global market for ETFs has experienced significant growth with assets under management exceeding US$9 trillion last year.
So, what exactly is an ETF?
ETF stands for "Exchange-Traded Fund." It is an open-ended investment fund that tracks a specific index, such as the FTSE Bursa Malaysia KLCI. ETFs are traded on an exchange, just like stocks, and can be bought and sold throughout the trading day. When you buy an ETF, you’re essentially buying a basket of stocks that make up a given underlying index. This provides you with exposure to a diversified set of stocks that help to diversify your risk.
Aside from FTSE Bursa Malaysia KLCI, you can discover a diverse selection of ETFs on Bursa Marketplace here to find ETFs that align with your investment goals.
ETFs have three key characteristics:
1. Exposure to a basket of securities: It tracks an index representing a basket of various assets such as stocks, bonds, commodities or a combination of asset classes. For example, if you buy FTSE Bursa Malaysia KLCI ETF, you are effectively buying shares from the 30 biggest listed companies that collectively represent the Malaysian stock market; or if you buy MyETF Dow Jones US Titan 50, you can gain exposure to the 51 largest shariah-compliant companies listed in the US.
2. Passively managed: It is designed to replicate the performance of an underlying index. Rebalancing of the ETF only takes place periodically when there’s a change of constituents or weightings in the underlying index. And because it is passively managed, the cost of the transaction is low.
3. Traded like stocks: The value of an ETF is based on the assets it holds, and the price of the ETF changes throughout the day as it is bought and sold on the stock exchange. There’s no minimum investment amount for ETFs. Just like stocks, they are traded in minimum board lots of 100 units, and you can buy ETFs using your trading account with your broker.
5 benefits of investing in ETFs
Although traditional mutual funds and unit trusts are still popular (due to broad diversification, professional management, and daily liquidity), the popularity of ETFs is mainly due to these 5 advantages over traditional investment products:
1. Diversification
Because ETFs track a specific index, they provide exposure to a broad range of securities across different sectors and industries depending on the index tracked. With just one transaction, investors can instantly own a diverse basket of securities or assets, making it an easy and efficient way to invest in regional and international markets that may not always be accessible.
2. Cost effective
ETFs offer good value with lower costs compared to unit trusts as they generally have lower management fees (typically less than 1%). Why is this so? ETFs are typically passively managed, as they are designed to track an index. In contrast, actively managing a portfolio requires a larger team to undertake extensive stock analysis, hence the need for a larger investment team and related costs.
3. Flexible
Bursa-listed ETFs can be bought and sold easily using your trading account. They also offer flexibility in terms of investment size, as they can be purchased in as little as 100 units. This means you can begin your ETF investment portfolio with just RM100.
4. Lower risks
As an ETF consists of a portfolio of securities, the risk is relatively lower than investing in an individual stock or asset class, as losses in one can be offset by gains in another.
5. 100% transparent
ETFs offer full transparency, with fully visible portfolio holdings. Investors can see changes in ETF prices in real-time throughout the trading day, as well as holdings of an ETF updated daily and announced on Bursa Malaysia's website. Issuers often produce monthly factsheets to keep investors updated on fund holdings and sector allocations. You can also access near real-time information, as well as independent third-party research reports on ETFs at BursaMKTPLC.
How ETF is different from stock & unit trust
While ETFs share some similarities with stocks and unit trusts, there are some key differences to be aware of:
- Stocks involve buying ownership in a specific company, meaning that your returns are directly tied to that company's performance. Investing in just stocks is akin to putting all your eggs in one basket. While this can be rewarding if the company does well, it can also be risky if the company encounters financial difficulties.
- Unit trusts are managed by professional fund managers, who invest in a diversified portfolio of stocks, bonds, and other assets. Unlike ETFs, unit trusts are not traded on an exchange and are priced only once a day. You are not able to see a true reflection of the price during the day should you wish to buy or sell.
- ETFs are designed to track a specific index and are traded on an exchange. ETFs offer diversification benefit that are similar to unit trust, but at a lower cost and provide full transparency like what you can see when trading stocks and shares.
Here is a simple and useful comparison chart from Bursa Academy:
Start investing in ETFs
If you're ready to start investing in ETFs, you'll first need to open a CDS and a trading account with a registered stockbroking firm in Malaysia. After opening an account here, you can start researching ETFs that align with your investment goals and risk tolerance.
For more information about ETFs, you can visit the Bursa Academy website.