A Beginner’s Guide To Investing In ETFs In Malaysia

A Beginner’s Guide To Investing In ETFs In Malaysia

Looking for an investment that’s affordable, easy to manage and lets you invest in many different assets at once? Exchange-traded funds (ETFs) could be what you need. Here’s how ETFs work, and why they could be a great addition to your portfolio.

What are exchange-traded funds, or ETFs?

ETFs are similar to unit trust funds, in that they pool investors’ money to buy a group of stocks, bonds or other investments.

Unlike unit trusts that involve regular buying and selling by the fund manager, ETFs are typically passively managed to track an index. This means that the fund manager of an ETF tracks or replicates an index, rather than selects individual stocks or assets to invest in.

An index is a sample portfolio used to represent a market or a segment of the market. For example, the FTSE Bursa Malaysia KLCI is an index that is made up of the 30 largest companies on the Bursa Malaysia, and is used to represent the Malyasian stock market as a whole.

How do you make money from ETFs?

Investors generally make money from ETFs through two ways:

  • Capital appreciation. Like stocks and unit trusts, you can make money from ETFs when you sell them after their prices go up.
  • Dividends. Some ETFs may also pay dividends on a half-yearly or yearly basis. You can find this information on an ETF’s prospectus, which is available on its company’s website.

How are ETF prices determined?

An ETF has an underlying net asset value (NAV), which is the sum of all the fund’s investments, after subtracting liabilities such as the cost of managing the fund, divided by the number of shares currently held by all its shareholders.

NAV = (assets – liabilities)/shares outstanding

Although it has a NAV, an ETF’s trading price depends on demand and supply. If more people are interested in buying the ETF (demand) than selling it (supply), its price goes up. But if more people are interested in selling the ETF than buying, its price goes down. An ETF’s traded price will generally not stray far from its NAV.

Types of ETFs

There are many types of ETFs that can differ by asset class, geography or investment approach. Here are common types you’ll see on Bursa Malaysia and international stock markets:

  • Equity. These ETFs invest in stocks. They might differ by region (e.g. only Malaysian stocks) or industry (only tech stocks).
  • Fixed income. These ETFs invest in fixed income securities, which refer to low-risk investments like bonds or sukuk.
  • Leveraged. These ETFs use debt to increase your returns. For instance, a 2x leveraged ETF would allow you to make (or lose!) two times more money for every price movement of the index.
  • Inverse. These ETFs allow you to gain returns when its index loses value. Conversely, you will lose money with an inverse ETF if its underlying index gains value.
  • Commodity. These ETFs track commodity indices, which in turn measure the performances of commodities like gold, silver and oil.

What are the pros and cons of investing in ETFs?

Here’s why you’ll want to consider investing in ETFs:

  • Low fees. As ETFs are usually passively managed, they tend to incur lower fees of between 0.08% and 1.09% a year.
  • Diversification. Investing in ETFs means that you’ll be able to invest in many assets at once with little money. By investing in the Dow Jones Islamic Market U.S. Titans 50 Index for example, you’ll immediately get to invest in the top 50 companies in the US that comply with Islamic investment guidelines. By diversifying into many types of investments, you can reduce the impact on your portfolio if any one of the investments within the fund underperforms.
  • Bought and sold like stocks. As they’re traded on the stock market, it’s quick and easy to buy and sell your ETFs.
  • Fits into a passive investment strategy. Don’t want to spend a lot of time picking out the right stocks? With ETFs, you won’t have to worry about individual stocks, as they are automatically selected for you.

As great as ETFs are, they do have their disadvantages:

  • You won’t beat the market. An ETF usually matches the performance of a market (or a segment of it), so your investment returns won’t outperform the market.
  • You give up some control over your portfolio. You can’t include or exclude specific stocks from an ETF.

Why you should pay attention to investment fees

A big draw of ETFs is that they generally have low fees. When you buy ETFs on the stock market, you’ll have to pay an upfront brokerage fee. Depending on your broker, that could mean around 0.1% to 0.7% of your transaction value, with a minimum of around RM7.

Similar to unit trust funds, an ETF also has an annual expense ratio – this is the annual expense of the fund that includes the management fee, trustee fee and other administrative costs.

However, since ETFs tend to be passively managed, they usually incur lower costs. In Malaysia, the annual expense ratio of an ETF can be between 0.08% and 1.09%. This can be much lower than unit trust funds, which can have an expense ratio of around 1.9%.

That doesn’t sound like a big difference, but a slightly lower expense ratio can save you a lot of money in the long run. Here’s an example of how it can impact your investment return over time, assuming a return of 7% every year. To keep things simple, we didn’t account for any upfront fees you may incur.

Portfolio growth at 7% return p.a.

 Zero-fee portfolioETFUnit trust 1Unit trust 2
Expense ratio0%0.6%1.5%2%
Initial investmentRM10,000RM10,000RM10,000RM10,000
10 yearsRM19,672RM18,596RM17,081RM16,289
20 yearsRM38,697RM34,581RM29,178RM26,533
30 yearsRM76,123RM64,306RM49,840RM43,219

In the example above, a difference of a few percentage points in your expense ratio could mean tens of thousands of ringgit over many years. This isn’t to say that you should always go for the investment option with the lowest fees – paying a unit trust’s annual expense ratio can make sense if you want to leverage on a fund manager’s expertise – but it does mean that you should be mindful of how it could impact your portfolio.

Here’s how Malaysian ETFs have performed

Here’s a list of all the Malaysian ETFs you can invest in, and how they have performed in the past few years.

ETFTypeExpense ratioPrice (RM)YTD return3-year return
ABF Malaysia Bond Index FundFixed income0.1575%1.2-0.31%17.76%
*FTSE Bursa Malaysia KLCI ETFEquity0.59%1.689.63%-3.02%
Kenanga KLCI Daily (-1x) Inverse ETFLeveraged and inverse0.59%1.91-11.22%
Kenanga KLCI Daily 2x Leveraged ETFLeveraged and inverse0.59%1.9819.73%
*MyETF Dow Jones Islamic Market Malaysia Titan 25Equity (Shariah compliant)0.49%1.1752.61%13.42%
MyETF Dow Jones U.S. Titans 50Equity (Shariah compliant)0.475%1.8530.06%82.38%
*MyETF MSCI Malaysia Islamic DividendEquity (Shariah compliant)0.505%1.520.61%21.59%
MYETF MSCI South East Asia Islamic DividendEquity (Shariah compliant)0.755%0.749.82%-4.52%
Principal FTSE ASEAN 40 Malaysia ETFEquity0.08%1.6612.38%-4.66%
Principal FTSE China 50 ETFEquity0.72%1.814.44%9.80%
TradePlus DWA Malaysia Momentum TrackerEquity0.21%1.12
TradePlus HSCEI Daily (-1x) Inverse TrackerLeveraged and inverse1.08%1.7-18.99%
TradePlus HSCEI Daily (2x) Leveraged TrackerLeveraged and inverse1.08%1.7320.41%
TradePlus MSCI Asia Ex Japan Reits TrackerEquity0.555%1.04
TradePlus NYSE FANG+ Daily (-1x) Inverse TrackerLeveraged and inverse1.09%1.6-42.04%
TradePlus NYSE FANG+ Daily (2x) Leveraged TrackerLeveraged and inverse1.09%12.94167.39%
TradePlus S&P New China Tracker-MYREquity0.59%8.1635.53%
TradePlus S&P New China Tracker-USDEquity0.59%234.31%
TradePlus Shariah Gold TrackerCommodity0.3675%2.53.70%48.24%
*Total returns are calculated using NAV per unit with the assumptions that dividends are reinvested. Data is accurate as of June 8, 2021.
Performance data from Bursa Marketplace; expense ratio data from Bursa Malaysia

How to invest in ETFs in Malaysia

a) Through the Malaysian stock market

ETFs are traded on the stock market, so if you want to invest in local ETFs, just open a stock trading account. You can find a full list of Malaysian ETFs on the Bursa Malaysia website.

b) Through an international broker

There are only 19 ETFs in Malaysia. But look overseas, and you’ll find a dizzying array of funds for every region, industry or asset you can think of. For example, you could invest in the space industry through the Procure Space ETF (UFO) or invest in livestock futures contracts through the iPath Bloomberg Livestock Subindex Total Return ETN (COW). We honestly didn’t make these stock tickers up.

Buying US stocks through a local broker can cost you a minimum of US$25 per transaction. Alternatively, you can also buy them through international brokers like TD Ameritrade, Saxo and Interactive Brokers. Some international brokers charge 0% commission when you buy US ETFs.

c) Through a robo advisor

Robo advisors typically invest in ETFs. When you invest through platforms like StashAway and MyTHEO, you’ll be investing in many international ETFs at once. This can be convenient, as you’d be able to diversify in many ETFs with little money. Robo advisors also help you set up, manage and rebalance your portfolio for a small fee.

But on the other hand, you won’t be able to choose the individual ETFs that make up your portfolio.

Do ETFs fit in your portfolio?

ETFs can make sense if you are looking for a beginner-friendly investment, if you don’t want to spend a lot of time on your portfolio, if you want to easily diversify your portfolio or if you’re looking for a unit trust alternative with potentially lower fees. Just remember that ETFs, like any other investment, aren’t foolproof. Always do your research before going in, and be aware of the investment risks.

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