Growing your wealth using Exchange-Traded Funds (“ETFs”)

Do you think of yourself as a long-term investor? Or would you rather invest without having to go through the trouble of analysing each company? If you answered yes to both, you have come to read the right post. ETFs listed on Bursa Malaysia offer retail investors a wide range of exposures, from the United States to China and ASEAN, and from equities to bond and gold.

Additionally, some of these ETFs have provided investors good returns. According to Refinitiv data, the 1-year return for TradePlus NYSE FANG+ Daily (2x) Leveraged Tracker is estimated to be around 63.4%. On the other hand, MyETF Dow Jones U.S. Titans 50 registered a 28.2% return, while TradePlus S&P New China Tracker-USD brought its investors around 20.8% of return over the same period.

As part of its on-going efforts to grow the ETF market, Bursa Malaysia collaborates closely with industry players in Malaysia to continue educating investors and raising investor awareness. There are more information and resources on ETFs available today that are easily accessible than they were before.

This article is for you if you are starting your investing journey and want to learn more about ETFs. In this article, we will provide you with more insights into the Malaysian ETF market and how you can use ETFs to grow your wealth.

What is an ETF?

Let us first understand what is an ETF.

An ETF is an open-ended investment fund that tracks the performance of a specific index. The index is important as it will tell you what the ETF will be investing in and is typically provided by reputable index providers such as Dow Jones, FTSE, and MSCI. In order to closely track the index performance, an ETF will usually buy and hold the securities that comprise the index’s constituents based on their respective weights in that index. It trades like a stock and is listed on a stock exchange. Quite simply, an ETF combines the features of a unit trust and a stock, offering you the best of both worlds.

An ETF, much like a unit trust, holds a basket of securities, may it be shares, bonds, physical commodities or derivatives, depending on the index that it tracks. With a single trade, it can provide instant diversification and exposure to an asset class, sector, country or region. It is a low-cost approach to investing as opposed to purchasing underlying securities yourself, which will likely result in much higher brokerage fees. Additionally, an ETF charges a management fee just like a unit trust does. However, the management fee of an ETF is generally lower than that of a unit trust that is actively managed. Unlike a unit trust, there is no sales charge, but you will incur a brokerage fee and related costs similar to trading a stock.

As mentioned earlier, an ETF trades like a stock. You can place your trades through a broker, just like you would with a stock. It is tradable whenever the market is open, giving you the flexibility to buy and sell at any time during market trading hours. The price of an ETF would generally reflect the value of the underlying basket of securities. However, this is not always the case as demand and supply for ETF units can have an impact on their price. Furthermore, prices quoted on the exchange typically reflect a bid-and-ask spread.

ETFs Investing Landscape in Malaysia

Malaysia saw its first ETF listing on Bursa Malaysia in July 2005. Since then, ETFs have grown in popularity amongst Malaysian investors. Today, more investors, particularly retail investors are trading ETFs. During the pandemic last year, we saw a surge in interest in ETFs. ETF total asset under management (AUM) reached RM2.2Bil while the average daily trading value (ADV) exceeded RM1.2Mil per day in 2020. While AUM has decreased this year, investor trading activities in ETFs has remained high. ADV level has remained close to the 2020 level, supported by an influx of new investors.

Bursa Malaysia currently lists 20 ETFs, six of which are Shariah-compliant. The majority are passive ETFs that track the performance of a single index. Of these, 11 are equity ETFs, 1 fixed income ETF, 1 REITs ETF and 1 commodity ETF. Then there are six Leveraged and Inverse ETFs, each of which provides 2x leveraged exposure or inverse (-1x) exposure to an underlying index, respectively. The table below provides a brief overview of these ETFs.

Why use ETFs to grow your wealth

If you are just starting out in investing, it is advisable that you start small as you may lack the expertise to do your own investments. Even if you have some experience, conducting research and keeping track of your investments can be time-consuming.

ETF can offer you the following:

• A hassle-free experience: Investing in one or more ETFs can provide instant diversification, saving you the time needed to build your own portfolio and at a fraction of the cost. For example, investing in the FTSE Bursa Malaysia KLCI ETF provides you exposure to the 30 largest listed companies on Bursa Malaysia by market capitalization. Meanwhile, investing in the Principal FTSE ASEAN 40 Malaysia ETF provides you exposure to the 40 largest listed companies by full market value in ASEAN that qualify for inclusion in the FTSE ASEAN 40 Index. However, please do note that some ETFs like the TradePlus Shariah Gold Tracker, only tracks a single underlying, in this case - gold.
• Grow your investment portfolio at your own pace: You can set aside small amounts of money for investment and add to it as you see fit. You can invest as low as 1 lot, which is equivalent to 100 shares. Except for three ETFs, all other ETFs listed on Bursa Malaysia require no more than RM300 to begin your retirement or savings portfolio (see chart below). Brokerage fees are very competitive nowadays, but keep in mind that most brokers charge a minimum brokerage fee.

Source: Bursa Marketplace, price as of 30 September 2021
*Based on indicative prices published on Bursa Marketplace, with investment of 1 lot (100 units) of ETF. This does not include any commission and fee and prices may vary which will affect actual investment amount.

• Lower overall cost: ETFs are less costly in a variety of ways. As previously stated, you get to save money on brokerage fees. For instance, through the FTSE Bursa Malaysia KLCI ETF, you only need to buy one ETF as opposed to investing in 30 stocks to achieve comparable diversification and exposure. In comparison, a unit trust has a sales charge and a higher management fee.

However, ETFs are not just for new investors. Experienced investors can also use ETFs as an efficient tool to gain exposure to a particular market or asset class. Inverse ETFs enable savvy investors to profit from a downward movement in the market.

Performance of ETFs listed on Bursa Malaysia

The chart below show the 1-year performance of the ETFs listed on Bursa Malaysia.

Source: Bursa Marketplace, as of 30 August 2021
Note: The VP-DJ Shariah China A-Shares 100 ETF was only launched on 28 Jul 2021

But it is important to note, past performance is not an indication of future performance.

Can ETFs offer better returns compare to unit trust?

Returns are not guaranteed. There are risks, as with any investment. An ETF seeks to closely track the performance of an index. Therefore, ETF returns will generally rise and fall in tandem with the index. On the other hand, a unit trust is typically actively managed by a portfolio manager with the goal of outperforming the index. Their management skill will play a role in how well the unit trust performs. Consequently, one cannot generalize to say that a unit trust can offer better returns compared to ETF, or vice versa.

So, is ETF for you?

ETFs are an efficient investment that allows you to gain access to a diversified portfolio in a cost-efficient way. However, you must first understand the risks and know your own risk appetite before assessing the suitability of any ETFs for your investment needs.

We hope this article has helped you learn more about ETFs. For more information on these ETFs, please visit our corporate website at www.bursamalaysia.com/trade/our_products_services/equities/exchange_traded_funds and our Bursa Marketplace website at www.bursamarketplace.com/mkt/themarket/etf

Investors can also learn more about ETFs by taking free courses made available on our Bursa Academy platform at bursaacademy.bursamarketplace.com/en/home. We  recommend that avid ETF investors undertake the "Empower your Leveraged and Inverse (L&I) ETF Investment Journey" course at bursaacademy.bursamarketplace.com/en/article/equities/empower-your-etf-investment-journey. Upon completion of this course, investors will receive a certificate that can be used as a basis of declaration when trading L&I ETFs.

Happy investing.

Disclaimer:
The information in this article is for general information purposes only and is provided on an “as-is” basis without any representations or warranties of any kind. The information does not constitute legal, financial, trading or investment advice. You are advised to seek independent advice and/or consult relevant laws, regulations and rules prior to relying on or taking any action based on the information presented. In no event shall Bursa Malaysia Berhad and its subsidiaries be liable for any claim, howsoever arising, out of or in relation to do not accept any liability for the information provided in these articles, (including but not limited to any liability pertaining to the accuracy, completeness or currency of the information,) and for any investment or trading decisions made on the basis of the information.