Exchange Traded Funds | How to Buy ETF in Malaysia?

What is an ETF?

Exchange Traded Funds (ETFs) is an open-ended investment fund. ETFs are listed on exchanges and shares trade throughout the day, just like an ordinary stock. ETF combines the features of an Index fund and a stock, and its liquidity reflects the liquidity of the underlying basket of shares.

There are three types of ETF namely equity ETFs, Leveraged & Inverse, and fixed income & commodity ETFs. The fee range for ETFs in Malaysia is between 0.2-0.8% in management fees per year, which is relatively low.

HOW DOES AN ETF WORK?

An ETF, which is designed to track the performance of an underlying asset, becomes available to traders when a fund provider decides to create a fund and sell shares in the fund to investors.

When an investor purchases an ETF from a specific fund, they become a shareholder and own a portion of the ETF but not the fund's underlying assets. Nonetheless, ETF investors may receive lump dividend payments or reinvestments for the index's constituent stocks, the returns of which may differ from the underlying asset.

HOW IS AN ETF PRICE DETERMINED?

The price of an ETF is determined by two factors. Although the underlying value of the asset, also known as Net Asset Value (NAV), has a large influence on the ETF price, there is also a market price for the ETF that investors should be aware of.

The market price of an ETF is the price at which investors can buy or sell it on an exchange. This price may differ from the NAV of the ETF at any given time, depending on demand and supply for the ETF.

The NAV of an ETF, on the other hand, represents the value of all securities held by the ETF – such as shares or bonds and cash – minus any liabilities such as Total Expense Ratio (TER), and is divided by the number of shares outstanding.

Types of ETFs

1. Equity ETFs

Stocks and equity are the same, as both represent the ownership in an entity (company) and are traded on the stock exchanges. Equity by definition means ownership of assets after the debt is paid off.

2. Leveraged & Inverse ETFs

Leveraged and Inverse ETFs are two types of ETF products created to produce targeted, multiple returns of the underlying index daily.

In the finance world, “leverage” is a technique that amplifies an investor’s profits or losses. Therefore, a leveraged ETF means the fund aims to provide amplified returns of the index’s daily performance.

While the word “inverse” simply means the “opposite”. Thus, in this case, inverse ETF means the fund aims to provide a return or performance that is the opposite of the index’s daily performance.

3. Fixed Income & Commodity ETFs

Fixed-income ETFs are also known as bond funds. There are fixed-income ETFs that focus on corporate, government, municipal, international, and global debt.

While a commodity ETF is an exchange-traded fund that is invested in a variety of physical commodities, including natural resources, agricultural goods, and precious metals. The commodity ETF focuses on either a single commodity or is focused on investments in futures contracts.

HOW TO BUY ETF IN MALAYSIA?

Since ETFs trade is just like stocks, you can buy or sell anytime during the trading day. But you need to first open a trading account with Robo-advisors, brokers, or Bursa Malaysia. You should also have a Demat account for holding the ETF units.

A Demat account (short for a Dematerialized account) is an account to hold financial securities such as equity in electronic form.

Then, you are required to furnish documents like:

1. Proof of identity: Identity Card (IC), Passport, Driving License
2. Proof of Address: Passport, Utility Bill
3. Bank Account Details: Bank Account Statement

After you have completed these formalities, you can buy and sell ETFs through this account.

WHERE TO BUY ETF IN MALAYSIA

In Malaysia, investors can buy and sell ETFs in a variety of ways. You have the option of doing it through the Malaysian stock exchange – the Bursa Malaysia – or through an international broker.

Let's go over the various ways to buy an ETF in Malaysia.

Bursa Malaysia

Because ETFs can be traded on the stock market, you can easily open a trading account with Bursa Malaysia, where you can find a list of all Malaysian ETFs that are available for you to buy and sell.

International Broker Platform

You can also sign up with an international broker to get a more comprehensive list of ETFs to buy. Purchasing US stocks through a local broker can cost as little as US$25 per transaction. You can also purchase them through international brokers such as TD Ameritrade, Saxo, and Interactive Brokers. When purchasing US ETFs, some international brokers charge no commission.

How to Buy a Foreign ETF in Malaysia?

If you have already started investing in an ETF, and wonder whether or not you can buy another country’s ETF, the answer is yes.

Investing in foreign listed stocks can be beneficial for many reasons. One great idea is the diversification of assets or currency.

There are two ways for you to invest in an international ETF as below.

1. Use Foreign Broker

Open a trading account in the country where the respective stocks originate from. For instance, open a trading account in the US to buy shares at the New York Stock Exchange (NYSE). In this way, you can keep your transaction costs to a minimum.

2. Use Local Broker with Foreign Stocks Trading

Open a global trading account in Malaysia associated with the local investment banks and security firms, and purchase foreign shares. The location of your assets will be considered local, although technically, your money is invested overseas.

LIST OF ETFs IN MALAYSIA

Which ETF is the Best Malaysia?

Each type of ETF in Malaysia may differ depending on what you consider to be important in your trading journey. However, to see the best overall performance, our team has done extensive research on the best ETF available in Bursa Malaysia.

According to our research, TradePlus Shariah Gold Tracker is the best ETF in Malaysia so far, with a 1-year total return of 28.65%.

The TradePlus Shariah Gold Tracker, Malaysia's first and only Shariah-compliant gold ETF, allows investors to invest in gold without the hassle of buying, storing, and selling gold bars. This ETF invests in gold bars, as opposed to other investments that provide exposure to gold mining or gold-related companies. Surprisingly, as long as the minimum requirements are met, investors can redeem this ETF's units for physical gold.

HOW TO CHOOSE THE RIGHT ETF

Define Your Investment Strategy

Define your investment strategy, including the investment objectives, investment period, and risk tolerance. It is always best to begin any financial planning by defining investment objectives first. Determine a reasonable investment period after determining your investment objectives. Finally, understand the limits of risk tolerance that you are willing to accept.

Choose the Right Asset Class

Based on your investment strategy, choose the appropriate asset class. For example, if your investment goal is to provide adequate retirement funds when you retire at the age of 55 (currently 35), your investment period is 20 years, and your risk tolerance is relatively high. This means you can bear a significant investment ‘loss' without having to sell other assets you own. 

Thus, equity is most likely the best asset class for you. To better understand risk tolerance, you should take a risk tolerance quiz or test available on any investment website.

Research and Understand the Selected ETF

The ETF you select should be appropriate for the asset class you select, as well as your investment objectives.

Why Invest in ETFs?

Exchange traded funds (ETFs) are ideal for new investors as they offer many benefits, such as low expense ratios, abundant liquidity, range of investment choices, diversification, and low investment threshold.

Besides, Malaysian ETFs generally have low trading volume and big market makers. With an ETF, investors can gain exposure to a geographical region, market, industry, and commodities such as gold.

Advantages of ETFs

DIVERSIFICATION

ETFs offer exposure to a wide range of securities such as an index and are traded like a stock. Depending on the ETF scheme, you can gain exposure to a variety of stocks, countries, industries, and commodities.

Cost-Effective

Lower annual management fees for ETFs compared to unit trusts makes ETFs economical to buy and to maintain in the long run.

Transparency

Most of the ETFs track an index, and this would mean passive management for the fund house to maintain the ETF portfolio. This makes it easier for the investor to know the performance of the ETF.

Disadvantages of ETFs

Lower Dividend Yields

There are dividend-paying ETFs, but the yields may not be as high as owning a high-yielding stock or individual stocks.

Less Diversification

For some sectors or foreign stocks, investors might be limited to large-cap stocks only due to a narrow group of equities in the market index.

Costs Could Be Higher

If you compare ETFs to investing in a specific stock, the costs are higher. The actual commission paid to the broker might be the same, but there is a management fee for ETF that could lead to a higher cost.

Conclusion

Now that we know what an ETF is and how you can start investing in an ETF in Malaysia. ETFs are used by a wide variety of investors to build a portfolio or gain exposure to specific sectors. They have many advantages, especially compared to other managed funds such as mutual funds.

But just like any other investment, there will always be risks. The same goes for investing in an ETF. There are disadvantages to watch out for before placing an order. Thus, investors need to prepare themselves with the right investment strategy and risk management before starting.

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