FAQs
FAQs on Exchange Traded Funds (ETFs)
Basics
- 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.
- What is an index? 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.
- What are the advantages of ETFs?
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 2nd market day after trade date (T+2).
- Affordability - For a small sum of money, you can invest in your desired securities investment.
- How to invest and where to buy ETFs?
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.
- What do I have to pay when buying and selling ETFs?
Like buying and selling stocks, investors need to pay brokerage commission, stamp duty, clearing fees and GST, where applicable.
- What determines the price of an ETF? 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.
- Do ETFs pay dividends?
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.
- How are transactions in ETFs settled?
In the same manner as share transactions i.e. not later than 3 market days after the transaction date (T+2).
- Is there any risk?
Yes, investing in ETFs, as in investing in stocks, is subjected to the same ups and downs of the market. The performance of ETF may be directly affected by the performance of its component stocks or bonds.
- What should I do before investing in an ETF?
You are advised to know the following before investing:
- Investment objective and strategy of the ETF
- Information on the index that the ETF is tracking
- Dividend policy
- Fees and charges that will be borne by investor
- Sources of trading information of the ETF
- Information about the management company
- What is the Indicative Optimized Portfolio Value (IOPV) for an ETF?
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 will disseminate the IOPV value for each ETF throughout the trading day.
- What is the tick size for ETF?
ETF ETF Price Tick Size ABFMY1 (Fixed Income ETF) At any price 0.1 sen Equity based ETF, Leveraged & Inverse ETF Less than RM1.00 0.1 sen Between RM1.00 to RM2.99 0.5 sen Above RM3.00 1 sen - ETFs vs. Unit Trust Funds: Know the Difference
ETFs hold a basket of securities to track performance of a specific index. Unit trust funds also hold a portfolio of assets. Nevertheless, both funds have marked differences.
The main differences between ETFs and unit trust funds are:
ETFs Unit Trust Funds (including index funds) Investing Objective - Passively managed.
- Designed to follow performance of an index.
- No active selection of underlying securities and returns made by ETF fund manager.
- ETF fund manager will closely follow performance of its benchmark index.
Excluding index funds: - Actively managed.
- Investors pay fund managers to select stocks (or other securities) in order to outperform a selected index.
- Performance of unit trust funds depends on the fund manager's skills and the supporting structure provided by the fund management company.
Buy and Sell Transactions - Listed and quoted on a stock exchange.
- ETFs are bought and sold like stocks throughout the trading day.
- Buy and sell via agents working for a fund management company or through institutional unit trust agents such as banks.
- Purchases or redemptions are done at a single price at the end of a trading day as the price of units in a fund depends on the closing price of its components.
Cost to Invest - There is a brokerage fee, clearing fee and stamp duty, similar to trading shares.
- The annual management fee usually is less than 1% of the fund's NAV.
- Usually impose up to 5.5% of upfront sales fee.
- Fund's annual management fee can be up to 5% per annum of the fund's NAV.
Minimum Investment Amount - Like shares, there is no minimum investment amount for ETFs.
- Most unit trusts usually require an initial minimum investment of RM 1,000.
- Subsequent investments are lower, typically RM 100.
More Similarities and Differences between ETFs and Funds listed here.
ETFS Unit Trust Funds Continuous trading and pricing throughout the trading day? Yes No Prospectus available? Yes Yes Can be purchased online? Yes Yes Redemption charges for withdrawals No *Yes Possible to view the underlying securities? Yes **No Possible to receive dividends? Yes Yes
* Only for specific unit trust i.e. through a bank
** Only for specific unit trust funds, typically bond funds.
*** Most funds only reveal their top ten holdings. - Product Comparison
ETFS Stocks Unit Trust Diversification ✓ - ✓ Real-time data available ✓ ✓ ✗ Trade via Broker Broker Agent Settlement cycle T+2 T+2** Varies from fund to fund * T+2 means the 2nd market / business day after trade date.
- What are the returns for investing in an ETF?
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.
- Capital gains
- Does ETF have a prospectus?
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.
- How is the market price of an ETF determined?
There are two types of prices for an ETF:
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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.
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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. The IOPV for the rest of ETFs is disseminated at 1 minute frequency on the same webpage.
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- What is the role of a market maker?
Most ETFs have a Designated Market Maker to provide competitive bid/ask price to ensure that investors are able to get in and out of the market throughout the trading day.