Malaysia’s first equity-based exchange traded fund (ETF), launched by the AmInvestment Bank group, made its maiden appearance on the Bursa Malaysia last Thursday (19 July 2007).
The introduction of the equity ETF as a viable alternative investment instrument had been inevitable but now that it has made its debut on the Bursa Malaysia, more ETFs can be expected to be launched within the next six months to a year.
Investors can also expect various flavours of ETFs in the next phase of development, for example, ETFs that are syariah-compliant or ETFs that specialise in overseas markets.
But what is an ETF? It’s a fund that bundles together the stocks in an index. In the case of the FBM30etf, it tracks the performance of the top 30 biggest companies listed on the Bursa Malaysia’s KL Composite Index.
If reading the above makes you feel that an ETF sounds like a Unit Trust index or equity fund, you are not wrong. There are some similarities between the two. For instance:
- An ETF, like a Unit Trust, gives small investors an alternative way to gain exposure to an index.
- An ETF, like a Unit Trust, invests in stocks quoted on the index.
- An ETF investor, like a Unit Trust investor, will be diversifying his risks.
But there are differences too:
- An ETF is traded through a remisier; a Unit Trust is transacted though a unit trust consultant (individual or institutional).
- Because the ETF is quoted directly on the stock exchange, its trading price fluctuates throughout the day and is determined almost immediately; for a Unit Trust, you only get to know the actual trading price on the next business day.
- An investor pays a commission when he buys or sells an ETF; for Unit Trust, the commission is charged when the investor buys into the fund, not when he sells.
So would you go out right now and place an order for the ETF with your remisier? I wouldn’t stop you if you do, but it is wise that you pause first to consider that ETFs do not usually track indexes as well as conventional index Unit Trusts.
A unit trust price is always its net asset value (NAV), which is the weighted average current market value of all the fund’s holdings, expressed as a per-unit basis.
On the other hand, an ETF’s market or trading price is driven by demand and supply. Even if an ETF follows exactly the same percentage of shares as the index it tracks, its market price at any time can be above or below the NAV. This means that it can be sold at either a higher or lower price than the per-share value of its underlying stocks.
It’s debatable whether this difference between the NAV and market price for an ETF is significant but you, as an investor, should still be aware of this point before you put your money there to work for you.
Some analysts are saying that investors’ interest in an ETF will be subject to the valuation of the fund which in turn will depend on the basket of stocks that makes up the fund. Possibly, ETFs may only appeal to certain investors or fund managers who like a mini-Malaysia type of fund that’s made up of Malaysian stocks.
Disclaimer: This article expresses only my personal opinion. Investors are requested to perform their own due diligence studies before they plunge into investing in an ETF. Above all, investment is always a risk game.