ETFs are similar to unit trust funds, in that they pool investors\u2019 money to buy a group of stocks, bonds or other investments.<\/p>\n
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.<\/p>\n
How do you make money from ETFs?<\/h4>\n
Investors generally make money from ETFs through two ways:<\/p>\n
- \n
- Capital appreciation.<\/strong> Like stocks and unit trusts, you can make money from ETFs when you sell them after their prices go up.<\/li>\n
- Dividends. <\/strong>Some ETFs may also pay dividends on a half-yearly or yearly basis. You can find this information on an ETF\u2019s prospectus, which is available on its company\u2019s website.<\/li>\n<\/ul>\n
How are ETF prices determined?<\/h4>\n
An ETF has an underlying net asset value (NAV), which is the sum of all the fund\u2019s investments, after subtracting liabilities such as the cost of managing the fund, divided by the number of shares currently held by all its shareholders.<\/p>\n
NAV = (assets \u2013 liabilities)\/shares outstanding<\/div><\/div>\nAlthough it has a NAV, an ETF\u2019s 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\u2019s traded price will generally not stray far from its NAV.<\/p>\n
<\/span>Types of ETFs<\/span><\/h2>\n
There are many types of ETFs that can differ by asset class, geography or investment approach. Here are common types you\u2019ll see on Bursa Malaysia and international stock markets:<\/p>\n
- \n
- Equity. <\/strong>These ETFs invest in stocks. They might differ by region (e.g. only Malaysian stocks) or industry (only tech stocks).<\/li>\n
- Fixed income. <\/strong>These ETFs invest in fixed income securities, which refer to low-risk investments like bonds or sukuk.<\/li>\n
- Leveraged. <\/strong>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.<\/li>\n
- Inverse. <\/strong>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.<\/li>\n
- Commodity. <\/strong>These ETFs track commodity indices, which in turn measure the performances of commodities like gold, silver and oil.<\/li>\n<\/ul>\n
<\/span>What are the pros and cons of investing in ETFs?<\/span><\/h2>\n
Here\u2019s why you\u2019ll want to consider investing in ETFs:<\/p>\n
- \n
- Low fees. <\/strong>As ETFs are usually passively managed, they tend to incur lower fees of between 0.08% and 1.09% a year.<\/li>\n
- Diversification. <\/strong>Investing in ETFs means that you\u2019ll 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\u2019ll 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.<\/li>\n
- Bought and sold like stocks. <\/strong>As they\u2019re traded on the stock market, it\u2019s quick and easy to buy and sell your ETFs.<\/li>\n
- Fits into a passive investment strategy. <\/strong>Don\u2019t want to spend a lot of time picking out the right stocks? With ETFs, you won\u2019t have to worry about individual stocks, as they are automatically selected for you.<\/li>\n<\/ul>\n
As great as ETFs are, they do have their disadvantages:<\/p>\n
- \n
- You won\u2019t beat the market. <\/strong>An ETF usually matches the performance of a market (or a segment of it), so your investment returns won\u2019t outperform the market.<\/li>\n
- You give up some control over your portfolio. <\/strong>You can\u2019t include or exclude specific stocks from an ETF.<\/li>\n<\/ul>\n
Why you should pay attention to investment fees<\/h4>\n
A big draw of ETFs is that they generally have low fees. When you buy ETFs on the stock market, you\u2019ll 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.<\/p>\n
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.<\/p>\n
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%.<\/p>\n
That doesn\u2019t sound like a big difference, but a slightly lower expense ratio can save you a lot of money in the long run. Here\u2019s 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\u2019t account for any upfront fees you may incur.<\/p>\n
Portfolio growth at 7% return p.a.<\/strong>
\n\n - You give up some control over your portfolio. <\/strong>You can\u2019t include or exclude specific stocks from an ETF.<\/li>\n<\/ul>\n
- Diversification. <\/strong>Investing in ETFs means that you\u2019ll 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\u2019ll 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.<\/li>\n
- Fixed income. <\/strong>These ETFs invest in fixed income securities, which refer to low-risk investments like bonds or sukuk.<\/li>\n
- Dividends. <\/strong>Some ETFs may also pay dividends on a half-yearly or yearly basis. You can find this information on an ETF\u2019s prospectus, which is available on its company\u2019s website.<\/li>\n<\/ul>\n
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