What is an Exchange Traded Fund?

An Exchange Traded Fund (ETF) is a new type of investment vehicle offered on the Bursa Malaysia. When you buy an ETF, you enjoy exposure to this entire portfolio of securities with only one purchase. And you can sell it in a single transaction as well.

Like a unit trust fund, an ETF allows you to have investment exposure to this collection of securities without the cost or hassle of buying all the securities individually. But unlike most unit trusts, it is traded on the Bursa, giving you greater flexibility to buy or sell it anytime, through any remisier or broker. And just like trading in specific stocks, you can buy or sell this fund through your broker at any time during the trading day.

There are many types of Exchange Traded Funds. Some may track specific sectors or industry groups; some may invest in bonds or other securities.

One common type of ETF is an Index Tracking Exchange Traded Fund. This kind of fund is made up of a basket of securities (equities, bonds, or a combination) designed to track the performance of a specific index. Being passively managed, the fund incurs less management fees, thus giving you cost-effective exposure to specific markets or sectors.

Key Features of an ETF

Exchange Traded
An ETF is structured like a unit trust but it is traded like a single stock on the Bursa Malaysia.

Trading Price
Each ETF has a Net Asset Value (NAV), calculated according to the market price of the individual securities in the portfolio. But just like a stock, an ETF’s trading price is determined by supply and demand on the exchange. So the ETF’s trading price may not be the same as its NAV. This can provide opportunities for arbitrage.

Distributions
An ETF may pay distribution. Check the individual fund’s distribution policy to know for sure.

Management Charges
As a managed portfolio of securities, the ETF incurs fund management and administrative fees, which are deducted from the ETF’s assets. The NAV is adjusted accordingly.

Transaction Charges
When you buy or sell the ETF, you will incur normal stock market transaction costs such as brokerage commission, stamp duty, and clearing fee, just as when you buy or sell an ordinary stock.

Market Risk
If you invest in an ETF, you will be exposed to risks similar to those involved in buying into individual securities. Investment returns are subject to market forces and to any risks inherent in investing in the specific country, industry, or type of security in which the ETF invests.

Management/Tracking Error
In the case of index tracking ETFs, there is no guarantee that the fund manager will successfully duplicate the performance of the index. The ETF could actually outperform or underperform the index. This could happen when a manager does not invest in exactly the same securities as the index but rather in comparable securities, and the performance of the comparable securities turns out to be different (positively or negatively) from those in the index. Differences in performance could also occur due to the manager’s choice of different security weightings from that of the index, and to the impact of administrative and other costs on the fund’s NAV.


Sources: http://www.ambg.com.my/abfmy1/etf/aboutexchangetradedfund.asp