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
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.
Similar to mutual funds, ETFs are very much liquid, i.e. easy to get in and get out.
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.
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.
Risks are controlled by investing in a range of asset classes. ETFs normally hold hundreds of stocks in their portfolio.
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.
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.
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