Basic & Introducing of ETF

Basic & Introducing of ETF

What is an ETF?

Exchange Traded Funds or ETFs, are open-end index tracking funds or trusts that are listed and traded real time on a stock exchange. An ETF is a security that tracks an index, a commodity or a basket of assets like an open-end investment fund, but trades on an exchange like a stock. Since ETFs are bought and sold on an exchange like shares, ETFs are priced and traded throughout the day. Essentially, ETFs combine the characteristics of an open-end fund and a stock.

An index is made up of a basket of securities (e.g. bonds, commodities, equities) that shows the movement or change in a specific securities market.

ETFs combine the benefits of stocks, unit trusts and index funds because they share common characteristics:

  • Easy access to diversification - own a basket of securities e.g. an entire market, country or region with a single trade
  • Flexibility - buy and sell during trading hours just like a stock
  • Low cost - low management fee and no upfront fee
  • Transparency - you know what you are buying as the underlying securities are disclosed. Prices are available real-time throughout the trading day.
  • Liquidity - Investor can redeem units easily and obtain cash by the 3rd market day after trade date (T+3).
  • Affordability - For a small sum of money, you can invest in your desired securities investment.

Similar to trading in stocks, you will be required to have a Central Depository System (CDS) account and a trading account maintained with a broker. You may buy or sell ETFs through your broker, remisier or via online trading during trading hours.

Like buying and selling stocks, investors need to pay a brokerage commission, stamp duty, clearing fees and GST, where applicable.

The market price of an ETF is usually very close to the Net Asset Value (NAV) of the fund i.e. market value of the underlying stocks and any net income not distributed. However, the price of an ETF can be affected by demand and supply in the market.

Most ETFs pay dividends to their fund holders either half yearly or yearly. You are advised to refer to the distribution policy in the prospectus or offering document of the ETF.

In the same manner as share transactions i.e. not later than 3 market days after the transaction date (T+3).

Yes, investing in ETFs, as in investing in stocks, is subjected to the same ups and downs of the market. The performance of the ETF may be directly affected by the performance of its component stocks or bonds.

You are advised to know the following before investing:

  1. Investment objective and strategy of the ETF
  2. Information on the index that the ETF is tracking
  3. Dividend policy
  4. Fees and charges that will be borne by investor
  5. Sources of trading information of the ETF
  6. Information about the management company

IOPV or Intraday Net Asset Value (iNAV) is the value that is intended to approximate the value of the securities held in the portfolio by the ETF fund manager and should closely represent the value of the fund throughout the day.

Bursa Malaysia, as the primary listing exchange for an ETF, will disseminate the IOPV value for each primary listed equity ETF throughout the trading day. For cross-listed ETFs, IOPV of the particular ETF can be obtained at the fund managers' website.

Investments in an ETF can potentially have two types of returns:

  • Capital gains

    Investors can trade ETF like a stock by buying it at a low price and selling it at a high price to realise profit.

  • Dividends

    The fund manager usually receives dividends from the securities that comprise the ETF baskets. The dividends are usually distributed to ETF unit holders following the deduction of management fee.

Yes. The prospectus is a very important document that needs to be read by a prospective investor prior to investing. The prospectus discloses important information, such as the fund’s objectives, fund manager’s background, management fees as well as the risks of investing in it.

There are two types of prices for an ETF:

  1. The trading price is a bid-and-ask price that appears on a trading screen. The trading price of an ETF is determined by demand and supply in the market. You can view the delayed ETF prices here.
  2. The net asset value (NAV) of an ETF is the sum of its assets minus liabilities. Usually, the NAV of an ETF is calculated by the ETF fund manager and will be published here.In addition, the IOPV or the indicative NAV (also known as iNAV) for ETF with underlying stocks listed on Bursa Malaysia are constantly calculated during trading hours. Investors can view the 15 minutes delayed IOPV here.