Exchange Traded Fund: ETF (An Alternative to Unit Trust)

The unit trust (mutual funds) industry is such a hot industry in Malaysia. Everybody is telling their friends and families to get on board! Unfortunately, there are a number of drawbacks when it comes to unit trust investments. Some of them are:

1. Absurdly high service charge
2. Absurdly high annual management fee
3. Quite difficult to get in and out

As far as I’m concerned, the first two are the main problems. I find that paying 5% to 6.5% is somewhat idiotic and immoral unnecessary.

So today, we shall be looking at Exchange Traded Funds or ETFs. This can very well be an alternative to the conventional unit trust investments. Please note that when I used the words unit trust and mutual funds, they both refer to the same thing.

Now, talking about ETFs, we can’t be comparing ETF with the unit trust industry as a whole. ETFs are essentially similar to unit trust’s index funds. The purpose of ETFs and index funds are to match the performance of the index that they are tracking. For example, a fund that tracks the S&P 500. They can also be called as tracker funds.

However, do bear in mind that there are a number of actively-managed ETFs as opposed to passively-managed ETFs. The ones stated above, ETFs that track indexes, they are passively-managed ETFs. Actively-managed ETFs on the other hand are ETFs that actively select and pick stocks and other instruments, in line with their investment strategy. For example, growth ETFs and etc.

Exchange Traded Funds (ETFs) are traded on the stock exchange, thus making it easier to get in and get out of your positions. In fact, that’s where the term “Exchange Traded” came from.

Let’s have a look at ETFs a bit further and contrast them with the traditional mutual fund’s equivalent of index funds.

WHAT ARE ETFs

An Exchange Traded Fund (ETF) is a collective investment scheme whereby investors’ money are pooled together to be invested in a basket of stocks. Most ETFs were designed to match the performance of the index that they’re tracking. There are also actively-managed ETFs.

THE CHARACTERISTICS OF ETFs

Lower Costs

This is the main attraction of ETFs. The annual management fees and expenses can be really low. The Malaysia’s listed FB30ETF which tracks the FTSE Bursa Malaysia Large 30 Index is charging only 0.5% p.a. of the Net Asset Value (NAV). Australia’s listed iShares MSCI Emerging Markets is charging 0.74% p.a. of the NAV. Most unit trusts in Malaysia are charging around 1.5% p.a. if I’m not mistaken.

Also, when it comes to the initial charge, you only pay the brokerage fees for ETFs. Compare that to the 5% charged by Malaysia’s unit trust funds!

To illustrate this further, let’s use my broker as an example. My broker charges only $19.95 for an order of up to $10,000. So, say the brokerage fees for entering and exiting my ETF position amounts to $39.90 ($19.95 X 2). Expressing that in percentage terms, you’ll get 0.399%. Compare that to the 5% charged by mutual funds.

Bear in mind though that brokerage fees can add up if you buy smaller parcels of ETFs over a period of time.

Traded on the Exchange

Exchange Traded Funds (ETFs) are traded on the stock exchange.

Liquidity

Similar to mutual funds, ETFs are very much liquid, i.e. easy to get in and get out.

Pricing

Price of ETFs are determined on the stock exchange it is trading while mutual funds’ price are based on its Net Asset Value (NAV), which is calculated at the end of the business day.

Transparency

Whatever that is in the portfolio of an ETF, are disclosed every single day by the ETF providers. Usually, this information is available on their websites.

For mutual funds on the other hand, usually, you’ll only be able to know what’s on their portfolio through their financial reports, which are released annually, or for some, quarterly.

Diversification

Risks are controlled by investing in a range of asset classes. ETFs normally hold hundreds of stocks in their portfolio.

Accessibility

You can buy and sell ETFs through your broker or investment advisers and throughout the day the stock exchange is trading.

For mutual funds, in Malaysia especially, you need to meet up with your unit trust agents to carry out transactions, which can be time consuming.

ETFs can be bought, and sold at prices determined throughout the day the exchange is open, while mutual funds can only be bought and sold based on NAV at the end of the day.

Long and Short

Due to ETFs being traded on the stock exchange, you can sometime short sell ETFs. However, not all of them can be short sold.

Ability to Set Stop Loss

With ETFs, it is possible to place stop loss orders with your brokers, thus managing your risks more effectively.

No Minimum Investment with ETFs

Generally, there’s no minimum investment amount with Exchange Traded Funds (ETFs).

Hope this article gives a snapshot of what ETFs are all about.

I’ll be buying into an ETF fund within the next couple of days. I will write about that pretty soon.

Till then, have a look at the materials below.

Examples of Exchange Traded Funds (ETFs) in Malaysia
MyETF
FBM30ETF
ABFMY1

Examples of Exchange Traded Funds (ETFs) in Australia
iShares
SSGA

Further information of Exchange Traded Funds (ETFs)
Wikipedia Entry
Fool.com
Yahoo.com
Investopedia

—————————————-

Disclaimer: This article is not a specific nor general advice on managing or investing your money. This article does not constitute a recommendation nor does it take into account your investment objectives, financial situation nor particular needs.

Go to HOME
Go to SITE MAP
Go to DISCLAIMER

Visit Nadlique’s Forum of Financial Freedom

Visit Pumpy’s CFD Trading Journal

Visit Lumpy’s Movie Reviews

Visit Nadlique’s Blog in Bahasa Melayu

Other related posts:

Fund’s Strong Performance
Stock Market Behaviour: What’s up with Wall Street?
Currency (FOREX) Trading
Risk Tolerance Level
Risk Tolerance Level: Part 2
Back to Basics: Recovering from Negative Returns

About nadlique

This blog is about the journey of a 28-year-old Malaysian towards financial freedom. This blog was started back when the blogger was 21 years old. However, his journey towards financial freedom had begun way before that. Materials such as investing, business, entrepreneurship, equities, and real estate are presented. The author also posts his thoughts and observations on life in general.

Comments

  1. Raulene says:

    Nice little intro on ETF. I’ve always wondered what ETF was all about. Have you invested in any ETF yet?

  2. Hi Raulene!

    Yup, I bought some ETFs last week. Planning to write about that pretty soon. Stay tuned!

  3. ChampDog says:

    Nice write up on ETC! Keep up the good job! 🙂 One day I may want to write about it too.

  4. ETF is still new in Malaysia…the first fund is in 2005… and i think, there are just 3 fund until now..

    erm..can you share with us on how to enter ETF market? the broker n so on..

  5. @ChampDog

    Thanks ChampDog. You should write about that in your blog as well. Spread the financial knowledge 🙂

    @Azree Hanifiah

    Yup, the ETF industry is pretty much still in its infancy in Malaysia. But we’re getting there.

    Well, how to buy ETFs is pretty simple. I’ll try to explain in Malaysia’s context. For those out there who knows better, please feel free to correct me.

    First you need to have a CDS account, and a trading account. I think you can do all these at any financial institutions that offer stockbroking services. After all that is done, then you can just buy ETFs through your broker. It’s the same as buying traditional shares.

  6. lonelyplanet92 says:

    i invest ETF Fund in HK, plenty of choices, also available in Singapore

Trackbacks

  1. […] my introduction to Exchange Traded Fund (ETF) entry, I wrote that I plan to allocate some money towards Exchange Traded Funds (ETFs). Well, I just […]

Speak Your Mind

*

Return to top of page

Copyright © 2019 · Faliq Fauzi · Log in