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A beginner’s guide to exchange traded funds (ETFs) in Malaysia

How to invest in exchange traded funds in Malaysia – the benefits, the risks and how to get started.

Invest in ETFs through a broker Compare online brokers

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How to buy ETFs in 5 steps (2021 update)

  1. Compare and find the best online stock broker for you
  2. Sign up for a trading account. You’ll need to provide personal details and proof of ID
  3. Transfer money into your trading account
  4. Search for the ETF you want and place a buy order
  5. Track the performance of your ETF

Exchange traded funds (ETFs) are investment funds made up of multiple stocks or other assets that can be bought and sold on a stock exchange such as Bursa Malaysia. This means that you invest in them through a stock broker, the same way you would buy stocks.

ETFs have become popular in the last few years in Malaysia thanks to the rise of index fund investing and because you can invest in multiple stocks in one trade. Our guide covers everything you need to know about ETFs, including how they work and how you buy in.

Compare online ETF brokers

ETFs are bought and sold just like regular stocks, so you’ll need to choose an online broker before you are able to invest.

Name Product Brokerage fee Interest on deposit? Intraday trade CDS fee
Zacks Trade
Zacks Trade
US$0.01
No
Yes
N/A
CFD Service. Your capital is at risk.
The Zachs Trade platform offers stocks, ETFs, bonds, options, and more with access to more than 90 exchanges worldwide
Alliance Bank Trading Account
Alliance Bank Trading Account
0.15% - 0.29%
Yes
Yes
N/A
CFD Service. Your capital is at risk.
Trade on-the-go and diversify your portfolio with a myriad of investment products, ranging from bonds to unit trusts.
CIMB Trading Account
CIMB Trading Account
0.22% - 0.45%
Yes
Yes
RM0
CFD Service. Your capital is at risk.
Access multiple stock exchanges,  exclusive research materials, real-time portfolio management, and other trading conveniences to grow your investments.
Hong Leong Trading Account
Hong Leong Trading Account
RM8 - 0.10%
Yes
Yes
RM10
CFD Service. Your capital is at risk.
Enjoy the flexibility of bursa trading and access global markets with a single platform.
Rakuten Trade Trading Account
Rakuten Trade Trading Account
RM7 - RM100
Yes
Yes
Free
CFD Service. Your capital is at risk.
Benefit from low fees and earn reward points when you trade on this all-in-one digital brokerage.
RHB Trading Account
RHB Trading Account
0.21% - 0.42%
Yes
Yes
RM10
CFD Service. Your capital is at risk.
Trade in futures, shares, and warrants across major foreign markets with Malaysia's largest investment bank.
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Compare up to 4 providers

What is an ETF?

An ETF is a low-cost investment fund that can be traded on a stock exchange such as Bursa Malaysia. These funds are created by ETF issuers and fund managers and are made up of a basket of securities such as stocks, cash and bonds.

Each ETF is allocated an exchange code and can be bought and sold by investors the same way that you would buy and sell stocks. By investing in ETFs, you can easily create a diversified portfolio and spread your investment across a wide range of asset classes, including Malaysian stocks, global stocks, fixed income, debt, foreign currencies, commodities and metals.

How to buy ETFs

You don’t actually buy individual ETFs, instead you buy ETF units – similar to company stocks. You buy these ETF units the same way that you do stocks, through a broker or online trading platform.

After you’ve signed up to a brokerage and decided which ETF to buy, you can search for the name or ticker code of the ETF. You’ll soon notice that each ETF has a price. This is called the unit price.

Buying example

Say you want to invest RM1,000 into your ETF of choice and the ETF unit price is RM1. The brokerage service you use also charges RM20 each time you place a trade (leaving you with RM980 to invest). Excluding the brokerage fee, you would buy 980 ETF units at RM1 each.

Before you buy, it’s a good idea to compare the ETF unit price with its IOPV price (disseminated by Bursa Malaysia throughout the trading day). The IOPV price tells you how much the price of the ETF should be relative to the assets it holds. When there’s a lot of volatility in the market, sometimes these two prices can be very different. If the ETF unit price is higher than the IOPV price, then you’re probably paying more than what the ETF’s true value is.

For this reason it’s a good idea to set a ‘limit order’ based on the IOPV price when you’re buying ETF units. A limit order allows you to select the price that you’d like to buy the ETF at. Once the ETF falls to that price, your order will go through.

Types of ETFs

While standard ETFs typically track a stock market index (called “passive” investing), others hold various other types of securities (such as cash) or are actively managed. Active management is where fund managers frequently buy and sell stocks and other assets to better improve the fund’s performance.

There are many types of ETFs these days, it all comes down to the strategy chosen by its fund managers.

What is an index fund?

Index funds track a selection of stocks that make up an index. For example, the FTSE Bursa Malaysia KLCI (FBM KLCI) is an index consisted of the largest 30 companies on Bursa Malaysia, while S&P500 and Nasdaq are indices comprised of some of the world’s biggest companies. An index fund will try to match the returns of its underlying index.

Index funds vs active funds

ETFs have a reputation for being low-risk and for delivering decent returns over a long period of time. That’s mostly true for index fund ETFs, but listed funds today come in many shapes and sizes, and some of them carry as much risk as any stock on Bursa Malaysia.

To make matters more confusing, the terms are frequently muddled between fund managers and investors. As a way to avoid confusion, securities authorities in some part of the world have broadly labelled them all “exchange traded products” (ETPs) and subcategorised them into “ETFs” (index funds), exchange traded managed funds (ETMFs) and synthetic funds or structured funds.

Despite their efforts, you’ll find they’re mostly just referred to as “ETFs” by investors and analysts.

  • Passive ETFs. Also known as indexed ETFs or index funds. These funds aim to replicate the returns of a specific index or benchmark. For example, you may want to invest in a fund that tracks the performance of the FBM KLCI (Malaysian stock market) or the S&P 500 (US stock market).
  • Active ETFs. Also referred to as exchange traded managed funds (ETMFs). Active ETFs aim to outperform the market or a particular index. These sometimes come with a higher level of risk and usually have higher management fees.
  • Factor and Smart Beta ETFs. Combines both active and passive strategies. They typically track an index but factor in additional variables, such as a higher weighting of smaller companies. Smart Beta ETFs track non-traditional indices designed to invest in a selection of company stocks based on their own set of rules. The idea is to outperform the market.

On the outside, these can appear to be very similar. However, they’re quite different in terms of strategy and level of risk.

What are structured or synthetic ETFs?

ETFs access investment assets in two ways: physically or synthetically. ETF issuers of a physical (or standard) ETF have purchased the underlying assets on the index it aims to replicate.

On the other hand, structured or synthetic ETFs try to replicate the performance of its underlying assets through the use of derivatives. This is because it’s not always practical to hold physical assets. For example, gold or commodity ETFs are often synthetic. Instead of investing in an actual lump of gold, you’re investing in a contract that promises returns based on the commodity’s price movements.

What is a derivative?

Derivatives are products that derive their value from underlying assets like commodities or stocks. Instead of purchasing a physical asset, it is a contract with an agreed upon return based on the price of the movements of the underlying asset.

Warning: Because structured products may use complex investment strategies, they can be much riskier than a standard index ETF.

What are ETMFs?

Active ETFs or ETMFs are actively managed listed funds. Fund managers aim to outperform the market by manoeuvring securities within the fund. As such, they may carry higher risk than passive index funds and usually charge higher fees for the service.

What are commodity ETFs?

Commodity ETFs, or exchange traded commodities (ETCs), track the performance of an underlying physical commodity, such as gold, natural resources and agricultural products.

What are the costs of investing in ETFs?

When you invest in an ETF, the first cost you’ll be aware of is the ETF unit price. However, there are other less obvious costs you need to be aware of. While ETFs typically charge lower fees than unlisted managed funds, this isn’t always the case.

You should always read the prospectus or offering document provided by the ETF issuer for full details of any fees that apply and how they will affect your investments. Here are the main costs to take note of:

  • Management fees. Just like any other managed fund, ETFs have management fees, which are sometimes referred to as the management expense ratio (MER). This fee is charged by the ETF issuer and is usually included in the unit price.
  • Brokerage fees. You’ll need to pay brokerage fees whenever you buy or sell ETF units. These fees vary depending on the online broker you choose and can range from RM8 to RM28 per trade.
  • The buy/sell spread. This is the difference between the highest price you’re willing to pay for an ETF unit and the lowest price at which a seller is happy to sell. The wider the spread, the more it can cost you.

Do ETFs pay dividends?

Some ETFs pay dividends if the underlying company stocks pay dividends. However it also depends on whether the fund manager chooses to pass this on, so check this first if this is a priority.

Most of the time ETFs will pay their dividends on a half-yearly or yearly basis, though this isn’t a rule. If you’re interested in ETF dividends, check the yield, how often it’s paid, and whether you can reinvest the payments back into the ETF if you choose or if it’s paid into your account.

How do I compare ETFs?

Like stock prices, the price of ETF units can fluctuate day-to-day. However, many ETFs move up and down in line with the index they are tracking, so there are a few simple tips to keep in mind to help you get more out of your ETF investments:

  • Compare the price. ETF issuers regularly provide net asset value (NAV) information, often in real time. This is commonly referred to as the indicative NAV (iNAV) or Indicative Optimized Portfolio Value (IOPV), and by comparing it with the buy and sell (unit) prices quoted by your ETF broker, you can determine whether you will get value for money.
  • Consider limit orders. The IOPV can change quite quickly throughout the day as volatility in underlying markets drives it up or down. If you’re investing in a volatile ETF, such as an exchange traded commodity (ETC), it may be safer to place limit orders rather than market orders when buying or selling, which will ensure that you get the price you want.
  • Management fees. All ETFs charge management (MER) fees which is taken as a percentage of your returns. The average fee is usually less than 1% of your funds – make sure the fees match your returns.
  • Markets and sectors. ETFs have all different themes. Some ETFs track large stocks from the US, others small-cap stocks from Malaysia or specific sectors such as health, tech or renewables.
  • Choose carefully. ETFs come in all shapes and sizes and carry different levels of risks depending on the type of assets it tracks. For example, while an ETF focused on resource stocks might offer the potential for higher returns, it also comes with a higher risk attached than an index that tracks the top 30 stocks.

What are the benefits of investing in ETFs?

There are many reasons to consider investing in ETFs:

  • Index fund investing. Index funds have become a popular way to invest relatively safely in the stock market. Most (not all) ETFs are types of index funds.
  • Diversify your portfolio. Buying units in just one ETF allows you to invest in many stocks and asset classes at once. By investing in many assets, you can minimise your level of risk.
  • Dividend income. If the underlying assets held by an ETF pay dividends, those dividends will be passed on to you.
  • Easy to access. Rather than researching and then buying into individual stocks, the ETF issuer does all the hard work of choosing investments for you; all you have to do is choose the ETFs and purchase the units via a broker or online trading platform.
  • Relatively inexpensive. Creating a diversified portfolio of stocks and other investment options usually requires a lot of money. But if you invest in ETFs, you can get started with as little as a few hundred ringgit at a time or less if you use a robo-advisor or micro-investing platform such as StashAway or Wahed.
  • Easy exit. Unlike some other types of investments that lock you into a contract for a fixed term, ETFs are open-ended. This means that as long as there is enough people buying and selling the ETF (called liquidity), you can sell your units for a competitive price anytime you choose. For example, if you need fast access to your funds or an emergency or opportunity, you can quickly cash out of your ETF.

What are the risks of investing in ETFs?

ETFs are often advertised as being a safer investment than directly buying stocks on the stock market, but this is not always the case. Although many ETFs are relatively safe index funds that track major indices, it’s also possible for an index fund to track a volatile global market, such as rare earth metals or the oil market.

You should also remember that technically any kind of asset can be bundled into a fund as well as risky derivative-type products. This means that not all ETFs are passive index funds as you may believe. Always do your research before you invest. Here are some of the main risks to consider:

  • Losing money. If the underlying assets owned by an ETF don’t perform as hoped, the value of an ETF will fall – and the value of ETF units you own will fall along with it.
  • Tracking errors. As we mentioned above, ETFs don’t always exactly mimic the performance of the index they’re designed to track, with fees, taxes and other factors potentially resulting in lower-than-expected returns.
  • Risks associated with individual ETFs. The underlying assets held by your ETF also come with their own risks. For example, if your ETF exposes you to investments that may be difficult to sell in certain market circumstances, such as commodities or emerging global markets, you’ll need to accept an increased level of risk.
  • International taxes. If you buy units in an ETF that is listed in a country other than Malaysia, you may need to pay foreign taxes. Make sure you’re aware of all tax implications of an ETF before you commit any funds.

Synthetic ETFs have all the same risks as physical ETFs, but they also expose you to a few additional potential problems:

  • Counterparty risks. Synthetic ETFs take out contracts with third parties, which are usually investment banks. If these third parties are financially unable to fulfil any commitments they make to the ETF, such as paying the return on the underlying index to the ETF, the performance of your investment will suffer.
  • Commodities risks. Most ETFs that track the performance of commodities are synthetic ETFs that track the futures price of a commodity or index. However, in some circumstances, the price of futures differs from the price of the actual commodity, so it’s essential to be aware of whether a fund tracks current or futures commodity prices before you buy.

Before deciding whether ETFs are the best investment solution for you, make sure you’re fully aware of how they work and have an in-depth understanding of all the risks involved. Read the prospectus closely, ask questions of the ETF issuer if you’re unsure about anything and consider seeking help from a qualified financial adviser.

Exchange Traded Funds (ETFs) frequently asked questions

Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades.

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