Exchange Traded Funds (ETF) are a great way to diversify your investments. To get a better understanding of ETFs, CompareHero.my spoke to experts from Affin Hwang Asset Management.
Though Exchange Traded Funds (ETFs) are not new, they have grown to be highly favourable among investors, sustaining their growth over the past decade, in part due to a well-developed ecosystem.
Since its debut in the early 1990s, the global market for ETFs has seen tremendous growth, with assets under management expected to exceed RM36.9 trillion by 2022, according to Bursa Malaysia.
This rise and growth is due to the many advantages ETFs have over other traditional investment products such as easy accessibility, low-cost diversification and trading opportunities.
Are ETFs and stocks the same? Not exactly. Though they aren’t entirely different, think of ETFs as a basket of stocks.
What is an Exchange Traded Fund and how does it work?
According to Bursa Malaysia, ETF is an open-ended fund listed or traded on a stock exchange. It tracks an index representing a basket of securities, bonds, commodities, and a variety of other assets.
With just a single transaction, investors can potentially gain instant exposure to any market, region, sector, asset class, or investment strategy.
Experts from Affin Hwang Asset Management say ETFs try to replicate a specific index as closely as possible. Their defining feature is explained in their name, “exchange-traded, ” which simply means they can be bought and sold like normal stocks on a stock exchange.
For example, the S&P 500 Index tracks the performance of the 500 large-cap listed-companies. So if an investor wants exposure to the Index, he will need to buy all 500 of the component stocks, and this would require a very high initial investment amount. As of August, 31, 2020, the S&P 500 had an average 10-year annual return of 12.66%.
ETFs are commonly known as a hybrid offering that combines the best features of unit trust funds, and stocks.
A cost-efficient and convenient method of gaining access to the Index, experts at Affin Hwang say, is to invest in a single ETF that tracks the performance of the S&P 500 Index. That way, the investor makes a single trade, and is only charged one transaction cost to have exposure to 500 stocks.
Easy access and diversification are some of the commonly cited benefits of ETFs.
What are the benefits of ETFs?
1. Easy access
Get exposure to a basket of assets through a single trade
2. Cost efficiency
Have exposure to multiple assets through a single transaction
3. Hassle-free investing
Gain exposure to foreign markets through the domestic stock exchange
What are the pros and cons of Exchange Traded Funds?
Through ETFs, investors can gain access to a wide range of underlying assets including equities, fixed income instruments, and commodities. ETFs also provide the opportunity to investors to gain geographical reach, i.e. exposure for foreign listed assets, according to experts from Affin Hwang Asset Management.
Some of the key benefits an ETF can offer to investors are:
1. Cost efficient solutions
Using the S&P 500 Index as an example, an investor would need to incur a transaction cost for each transaction, which equates to 500 individual transaction costs, as opposed to only one if the investor invested in an ETF.
2. Hassle-free solution
Unlike physical gold that needs a physical storage space, ETFs are managed by ETF managers who would need to be responsible for the logistics, storage, and security of the asset under the ETF, like gold for example. An investor just needs to merely transact their gold ownership on the stock exchange.
3. Diversified exposure
ETFs can give investors diversified exposure through a single transaction. Using the TradePlus S&P New China Tracker ETF as an example, which tracks the performance of the New China economy through companies that are listed on both the Hong Kong, and the U.S. stock exchange.
An investor wanting to replicate the index would be required to use the services of a foreign broker to buy into stocks that are quoted in both HK Dollar, and the U.S. dollar. They would also need to consider the time difference as well, as different markets open at different hours.
However, by investing in the TradePlus S&P New China Tracker ETF, for example, an investor could be relieved of any concerns as they could trade during Bursa’s trading hours, and also trade in MYR (and also USD, for those looking to invest in foreign currency. This ETF is the first and only dual currency listed ETF on Bursa).
4. Start investing with a smaller investment amount
Because ETFs are pooled investments, excerpts at Affin Hwang say, investors can gain access to a basket of assets at a fraction of the cost. Thus, ETFs enable investors to mitigate their concentration risk even with a smaller investment overlay.
Types of ETF
ETFs are index trackers, meaning they try to replicate a specific index as closely as possible. Their defining feature is explained in their name, “exchange-traded” means they can be bought and sold like normal stocks on a stock exchange.
And because ETFs are structured as a collective investment scheme, it pools investors’ investments together to enable the ETF to buy into the assets that it tracks.
Let’s take the S&P 500 Index as an example. The Index tracks the performance of 500 larger companies listed on the US exchange. If an investor wants exposure to the Index, he will need to buy all 500 of the component stocks, and this would require a very high initial investment amount.
However, by pooling the investors’ assets together, initial investments can be lowered as investors would be able to gain fractional exposure to the index at a fraction of the price.
As such, ETFs are commonly known as a hybrid offering that combines the best features of Unit Trust Funds, and Stocks.
For a cost efficient, and convenient method of gaining access to the Index, one can invest in a single ETF that tracks the performance of the S&P 500 Index. This way, the investor makes a single trade thus is only charged 1 transaction cost to have exposure to 500 stocks.
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