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Have you ever thought about investing in shares but weren’t sure where to start? After all, with over 900 companies listed on Bursa Malaysia, you might not know how to choose one. Investing in shares can also be scary because it is more risky than other investments like fixed deposits.
But did you know that instead of choosing one company, you could invest in many companies at one go through an Exchange Traded Fund (ETF)?
What is an ETF?
You can read our guide to understand more on the basics of ETFs, but in short, an ETF is a group or basket of shares which are put together to form a fund. The index which an ETF tracks is called an underlying index and the underlying index is made up of basket of securities like stocks, bonds, commodities like gold or futures like palm oil futures and index futures.
For example, the FTSE Bursa Malaysia KLCI ETF tracks the FBM KLCI. The FBM KLCI is the stock market’s key index that measures the performance of the 30 largest companies on Bursa Malaysia. The index gives a general picture of the performance of Malaysia’s stock market. By investing in this ETF, you’re investing in some of the country’s biggest companies all at once while also getting exposure to the performance of the overall stock market.
Pros and cons of ETFs
An advantage of ETFs is that your risk is immediately diversified because you’re investing in a basket of shares from different companies instead of just one company.
The diversification you get from investing in a basket of securities is actually what makes ETFs like unit trusts. But ETFs are known for having lower fees than unit trusts because you’re not paying fund managers to actively manage your investments for you and there are no agent sales charges.
The commission for buying ETFs is similar to that of buying stocks, which could start from 0.1%. You might also have to pay management fees of up to 1%.
On the other hand, the upfront sales charges for unit trusts will cost up to 5% of your investment and unit trust management fees range from 1-3%.
Although investing in ETFs is cheaper than unit trusts, you’ll be charged at least RM7 in broker fees every time you trade an ETF. So, if you were thinking of investing small amounts over several times, in the long run you might end up paying more in fees.
For example, say the brokerage fee is RM8 and you want to invest RM100. Your upfront cost would be RM8/RM100 x 100 = 8%. In comparison, the upfront cost for investing in unit trusts is usually around 6%.
But if you invested RM1,000, and paid a brokerage fee of RM8, your upfront cost would only be 0.8%, which gives you more value for your investment. A rule of thumb to follow would be to invest at least RM700 every time you invest in an ETF, which will keep your upfront brokerage costs between 1%-2%, depending on your brokerage fees. You should also remember to check with your broker about any fees you’ll have to pay so you know exactly how much you’re spending when you invest.
Getting to know ETFs
If you want to learn even more, check out Bursa Malaysia’s information on ETFs and all the 19 ETFs currently available on the stock exchange. You can also read up on research about ETFs.
Bursa Malaysia is giving the first 500 investors who invest a total of RM3,000 or more in ETFs from now until 31 Dec 2020 a chance to win a RM150 Touch ‘n Go e-wallet reload. You don’t have to invest RM3,000 all at once and you can invest in more than one ETF. You can find out more about this campaign here.
If you’re ready to invest in ETFs, you’ll need to have a Central Depository System (CDS) account and a trading account managed by a broker. You can then buy or sell ETFs through your broker, remisier or online. You can read more on opening a brokerage account and CDS account here.