- What’s an ETF
- Advantages of ETFs
- Quick explanation of UTs vs ETFs vs Stocks
- Unique usage of ETFs
- What strategies work in ETF investing
- Where and how to buy ETFs from Malaysia
- Why don’t I use an ETF?
What is ETF
ETF = Exchange-traded Fund
“Exchange” refers to the stock exchange, where the shares of public listed companies change hands.
“Traded” means it is bought and sold like stocks.
“Fund” means it works like unit trust funds or mutual funds.
So literally, an ETF is a fund that you can trade like stocks on the stock exchange.
Advantages of ETF
An ETF has all the advantages of a unit trust fund, and usually better. The benefits similar to unit trust funds are:
- Low initial capital
- High liquidity
- Diversified portfolio
- Professionally managed
Although an ETF works very similar to unit trust funds and investment-linked funds, it is more cost effective because there is no commission to pay the marketing agents. Moreover, the ETF recurring management fees is lower because the fund is passively managed to track a certain index or asset class.
Unit Trust Funds Vs ETF Vs Stocks
Usage of ETFs?
- Passive investing in the broad market
When you believe in the future growth of a specific market, you can save the hassle of individual stock picking. e.g. S&P 500, Nasdaq 100, China Top 50, etc.
- Gain fast exposure to specific sectors
e.g. small cap, commodity, international, emerging-market, biotechnology, REITs, healthcare, technology, ESG (Environmental, Social, and Governance)
- For hedging purposes and to lock your gain without selling your stocks
You can do this with the leveraged ETFs and inverse ETFs
- Get easier exposure to markets that are harder to reach:
E.g. South America, South Africa, smaller countries
What Strategies Work in ETF investing?
- Buy & Hold, Long-term investing
- Dollar Cost Averaging
- Build a portfolio and rebalance on your birthday
- Pick reputable ETF sponsors, that has lower expense ratio and high liquidity
Where to Buy ETFs?
First option: you can buy the local ETFs in Malaysia.
There is a list of ETFs available on Bursa Malaysia. For Malaysians, buying the local listed ETFs have some advantages:
- Hassle free: you can buy with any local trading account
- Shariah compliant options: for our muslim friends, there are several Islamic ETFs for you to choose
- No estate tax issue: Malaysia has no estate tax as of now.
The disadvantages are:
- Limited choices
- Lack liquidity: wider bid-ask spread of buy & sell price, resulting in higher transaction costs
- Higher management fees: the reason is that the asset size is very much lower than the US-listed ETFs. You will be paying around 0.6% compared to some well-known foreign ETFs that have an expense ratio as low as 0.03% due to the economies of scale
The other option is to buy the foreign ETFs.
It is a good idea to invest with the big brand ETFs sponsors like Blackrock and Vanguard.
- Local brokers – more expensive
- Foreign brokers – more hassles, open foreign trading account, transfer money out of the country,
But if you want to buy the overseas ETFs, go with the Ireland domiciled ETFs that is listed on LSE (London Stock Exchange) for two important reasons:
- There is no estate tax. If you buy a US domiciled ETFs, there is an estate tax for amounts over US$60,000, ranging from 18%-40% tax rate.
- The usual US dividend withholding tax 30% is lowered to 15% if it is Ireland-domiciled due to the tax treaty.
Why don’t I use an ETF?
I don’t invest through an ETF. I rather pick individual stocks.
- No holding cost: no need to pay any management fees
- Choose the best of breed:
When I was young, like in my 20s, I loved buffets where I could sample all the food. I didn’t know what was good so I would try everything. When I get older and more experienced, I no longer fancy a buffet. I want a well-prepared dish rather than sampling everything.
It is the same with my investment portfolio. I started out with unit trusts and even became an agent. Later when I become a more experienced investor, I would like to directly own the shares of great companies and tag along with their growth and no longer invest through unit trusts of ETFs
By the way, you can check out the 90 minutes free training on how we pick stocks. I even reveal the exact formula in the training.
Let’s conclude the main takeaways:
- Besides unit trusts, you can build a very diversified portfolio with ETFs that is more cost effective.
- If shariah-compliant is important to you, there are several islamic ETFs listed in Bursa Malaysia
- If you want to invest in foreign ETFs, choose the Ireland-domiciled ETFs listed on LSE because of no estate tax and lower dividend withholding tax.
Be smarter with money!