If you wish to have a meaningful exposure of your capital to the Malaysian stock market, what are the viable channels that you can choose to invest in? 

Option A: Invest in the 30 Largest Stocks in Malaysia

You may log into your stock brokerage account and purchase shares of every 30 biggest companies listed on Bursa Malaysia. How much do you think it would cost? 

Based on a minimum transaction of 100 shares and online stock brokerage fees of RM 12 a transaction, the minimum amount of investment capital required to enjoy such market exposure is RM40,828, based on 18 Oct 2019 closing price.

The calculation is as follows:

No.30 Largest StocksStock Price (18/10/2019)Gross Purchase Cost of 100 Shares Estimated BrokerageFeesFinal Purchase Cost of 100 Shares
1Public Bank BhdRM19.28RM 1,928RM 12RM 1,940
2Malayan Banking BhdRM8.50RM 850RM 12RM 862
3Tenaga Nasional BhdRM13.80RM 1,380RM 12RM 1,392
4CIMB Group Holdings BhdRM5.00RM 500RM 12RM 512
5PETRONAS Chemical Group BhdRM7.38RM 738RM 12RM 750
6Axiata Group BhdRM4.22RM 422RM 12RM 434
7Sime Darby Plantation BhdRM4.81RM 481RM 12RM 493
8Digi.com BhdRM4.69RM 469RM 12RM 481
9IHH Healthcare BhdRM5.67RM 567RM 12RM 579
10Petronas Gas BhdRM16.66RM 1,666RM 12RM 1,678
11Maxis BhdRM5.44RM 544RM 12RM 556
12Dialog Group BhdRM3.47RM 347RM 12RM 359
13IOI Corporation BhdRM4.25RM 425RM 12RM 437
14Genting BhdRM5.70RM 570RM 12RM 588
15Hong Leong Bank BhdRM17.00RM 1,700RM 12RM 1,712
16PPB Group BhdRM17.94RM 1,794RM 12RM 1,806
17Kuala Lumpur Kepong BhdRM21.50RM 2,150RM 12RM 2,162
18MISC BhdRM8.30RM 830RM 12RM 842
19Top Glove Corporation BhdRM4.33RM 433RM 12RM 445
20Nestle (Malaysia) BhdRM144.20RM 14,420RM 12RM 14,432

21
Press Metal Aluminium Holdings BhdRM4.77
RM 477

RM 12

RM 489
22Hartalega Holdings BhdRM5.25RM 525RM 12RM 534
23Genting Malaysia BhdRM3.05RM 305RM 12RM 317
24Sime Darby BhdRM2.29RM 229RM 12RM 241
25AMMB Holdings BhdRM3.95RM 395RM 12RM 407
26PETRONAS Dagangan BhdRM23.30RM 2,330RM 12RM 2,342
27Malaysia Airport Holdings BhdRM8.13RM 813RM 12RM 825
28Hap Seng Consolidated BhdRM9.85RM 985RM 12RM 997
29RHB Bank BhdRM5.66RM 566RM 12RM 578
30Hong Leong Financial Group BhdRM16.26RM 1,626RM 12RM 1,638

Total Investment Costs for 100 Shares in Each 30 Largest Stocks in Malaysia: RM40,828

Option B: Invest in FBM KLCI ETF 

Alternatively, you may purchase units of FBM KLCI ETF at RM 1.67 per unit from your stock brokerage account. If you are buying 1,000 units of FBM KLCI ETF for a total of RM 1,682 (inclusive of RM 12 in brokerage fees), you will gain yourself a decent investment exposure in all of the 30 shares stated above. 

Question: How does it work? 

First, in general, ETFs are designed to track the performance of their underlying assets / indices. For FBM KLCI ETF, it aims to track similar performances, in terms of both price and yield, of the KLCI for the long-term by investing in shares in each of the 30 biggest stocks listed on Bursa Malaysia. As such, you would emerge as an indirect owner of all of the 30 stocks by just investing in FBM KLCI ETF. 

Question: Can I buy 100 units of FBM KLCI ETF instead of 1,000? 

Yes, you may, but it is not cost-efficient. For instance, if you buy 100 units of the ETF, it would cost RM 179. It works out to be RM 1.79 a unit in investment cost, more expensive than RM 1.682 a unit if you are to invest 1,000 units. 

No. of UnitsUnit PriceGross Purchase CostEstimated Brokerage FeesFinal Purchase CostFinal Purchase Cost per Unit
100RM 1.67RM 167RM 12RM 179RM 1.790
1,000RM 1.67RM 1,670RM 12RM 1,682RM 1.682

Option C: What about Unit Trust Funds?

Yes, you may invest in unit trust funds with exposure to local equities. For some instances, ETFs are likened to unit trust funds for both vehicles enable investors to gain instant market access to a basket of investment securities. 

With that being said, there are differences between the two, which includes: 

Investment VehiclesETFsUnit Trust Funds
Fund ObjectivesTo track investment performances of specific indices such as KLCI, DJIA, … etc or commodity prices such as Gold.They are set by the founders of unit trust funds and thus, vary from fund to fund. 
Reporting – Financial Reports (Quarter & Annual)
– Reports All Investments in the Fund. 
– Fund Prospectus & Performance
– Reports Top 10 Holdings of the Fund.
Transaction MethodListed on Bursa Malaysia. Thus, ETFs can be bought or sold like any stocks listed on the stock exchange. Each ETF has at least one Market Maker to buy/sell from investor throughout a trading day and thus, posing no liquidity issue.Buy or sell through unit trust agents. 
Transaction FeesDepends on Stock Brokerage that you are using currently. Typically, the fees are below 1% of the purchase cost. Depends on the Unit Trust Company. You may incur a sales charge of 3-5% for purchasing 
Portfolio Turnover Ratio (PTR)Generally Lower because ETFs are, in most cases, setup to track results of a specific index for the long-term. Thus, the management of the fund is often passive. Can be High or Low, depending on the objectives of the fund. If PTR is high, it is hard to know what exactly you have bought into as the manager would be more active in managing the fund.  

Choices of ETFs on Bursa Malaysia

Apart from the FBM KLCI ETF, there are ten other ETFs listed on Bursa Malaysia. Each of them is designed to track the market performance of either a specific geographical location or a particular class of an investment vehicle. They include: 

Market PerformanceETFs


Malaysia
– FBM KLCI ETF- MyETF Dow Jones Islamic Market Malaysia Titans 25 (Shariah)
– MyETF MSCI Malaysia Islamic Dividend (Shariah)

ASEAN
– CIMB FTSE ASEAN 40 Malaysia
– MyETF MSCI South East Asia Islamic Dividend (Shariah)

China
– CIMB FTSE China 50
– TRADEPLUS S&P New China Tracker
Asia-Pacific ex. Japan– MyETF Thomson Reuters Asia-Pacific Ex-Japan Islamic Agribusiness (Shariah)
United States– MyETF Dow Jones U.S. Titans 50 (Shariah)

Others
– TRADEPLUS Shariah Gold Tracker (Shariah)
– ABF Malaysia Bond Index Fund

Soon, in November 2019, Bursa Malaysia will be introducing two new strategies for investors to either boost their investment returns into ETFs without needing to invest additional capital into them or to profit from a possible downtrend of an index or market. The two strategies are as follows: 

Strategy 1: Amplifying Results with 2x Leveraged ETF

For a start, an ETF is designed to track the performance of a specific index. Let’s call it – Index A. 

A 2x Leveraged ETF on Index A is a fund which aims to provide 2x the return of Index A on a daily basis. For instance, if Index A gained 2% in return in a day, the 2x Leveraged ETF would provide a return of 4% to its investors. But, if Index A losses 2% in value, the 2x Leveraged ETF would return 4% in losses to its investors. 

Therefore, if you believe that Index A is on a bullish trend, you can invest in a 2x Leveraged ETF which shall enhance your return as Index A goes up. 

Index AGain 2%Loss 2%
2x Leveraged ETFGain 4%Loss 4%

Strategy 2: Profit from a Downtrend with an Inverse ETF 

However, let’s say, you are pessimistic of the prospects of Index A. So, what can you do to profit from it? 

The answer is to invest in an Inverse ETF. 

An Inverse ETF on Index A is a fund which aims to provide the opposite return of Index A on a daily basis. In this case, if Index A lost 2% in value, you would make a 2% profit from your holdings onto an Inverse ETF. Likewise, if Index A made 2% in returns, you would witness a 2% loss in your investments into the Inverse ETF. 

Index AGain 2%Lost 2%
Inverse ETFLoss 2%Gain 2%

Daily Rebalancing & Compounding Effects on 2x Leveraged & Inverse ETFs

The calculation of returns for both 2x Leveraged ETF and Inverse ETF is mostly dependent on the concept of daily rebalancing. Let me explain. 

For both ETFs, their issuers aim to deliver multiples (be it, double or reverse) of the daily performance of the underlying index. Thus, after one trading day, both ETFs will reset their exposures which lead to compounding returns daily to their investors. The returns are best illustrated as follows: 

DayIndex A – Point2x Leveraged ETFInverse ETF
0100RM 100RM 100
1110
(100 x 110%)
RM 120
(RM 100 x 120%)
RM 90
(RM 100 x 90%)
2121
(110 x 110%)
RM 144
(RM 120 x 120%)
RM 81
(RM 90 x 90%)

Therefore, in the event that Index A gain 10% on the first and second day, Index A’s cumulative gain may be 21% in two days, but it does not mean that: 

1. Double of Index A return should be 42% (21% x 2 days). Instead, the 2x Leveraged ETF on Index A ETF makes 44% returns over the two days. 

2. The opposite return of Index A in 2 days should be a loss of 21%. Instead, the Inverse ETF on Index A has reported a loss of 19% in the two-day period. 

When the market is trending, either bullish or bearish, the compounding effect tends to be favourable to both 2x Leveraged and Inverse ETFs. However, the compounding effect tends to have a negative impact on the 2x Leveraged and Inverse ETF returns when market is volatile and moving sideways. 

What about Trading Futures Contracts by Myself? 

Good question. Here is my take: 

I believe, if you wish to further leverage on your exposure to an asset class, you may opt for futures contracts as a preferred vehicle. For instance, today, I found that the FBM KLCI is trading at 1,571 points. Based on the contract specification given by FTSE Bursa Malaysia KLCI Futures, you may begin by placing a ‘deposit’ known as initial margin of around RM 4,000 to control of RM 78,550 in contract size, which is a leverage of nearly 20x. 

This may lead to a more significant profit if the futures contract increases in value. But, it would cause a big hole to one’s capital if the value decreases. 

The leverage offered by the futures contract has an expiry date. If the contracts are not being ‘rolled over’ in its stipulated time, you might risk burning your capital in futures trading. This is different from ETFs as they do not possess any date of expiry. Investors can hold onto them for as long as they wish. 

As such, if you are not a sophisticated futures trader, it is best to use ETFs. 

Conclusion: 4 New ETFs on Bursa Malaysia

ETFs provides investors with a quick, simple, convenient, and a cost-efficient method to have access to a market, asset class, or a basket of securities both locally and overseas. It is an ideal investment vehicle for passive investors who wish to be invested, without having to spend loads of time to do their own stock picking. 

Personally, I think the launch of the two new strategies stated above will allow investors to manage their portfolios with greater flexibility. But, with that being said, it is best to learn more and gain more insights on how to use them first.                 

On 27 November 2019, Bursa Malaysia would be launching four new ETFs. They include: 

1. The Hang Seng China Enterprises Index (Available in 2x and Inverse ETFs) 

It tracks stock price movements of the 50 biggest companies in Mainland China which are listed on the Hong Kong Stock Exchange. They include key companies such as Ping An Insurance, Tencent, China Construction Bank, China Mobile Ltd, and Industrial and Commercial Bank of China. 

Therefore, if you are optimistic about the prospects of China, you may consider leveraging your returns by opting for its 2x ETF. Whereas, if you are pessimistic about its prospects, you may profit from its downturn by having a position in its Inverse ETF. 

2. The NYSE® FANG+™ Index (Available in 2x and Inverse ETFs) 

FANG refers to U.S. stocks namely, Facebook, Amazon, Netflix, and Google (now known as Alphabet). The four companies were the initial companies included in the index. Presently, it has expanded to include six additional technologically advanced companies such as Apple, Alibaba, Baidu, Tesla, NVIDIA, and Twitter. 

Similarly, if you are optimistic about the outlook of these companies, you may take up a position in its 2x ETF to boost your returns from this sector. Whereas, if you are pessimistic, you may profit from its downturn by having a position in its Inverse ETF. 

For more information, please go to www.bursamarketplace.com/lnietf


KCLau
KCLau

Personal finance author and trainer

    2 replies to "How to Gain Market Exposure, Amplify Results and Profit from a Downturn in Markets with the Power of ETFs?"

    • Arthur

      Thanks KC for detailed explanation on 2x and Inverse ETFs. Can you explain further how it would have negative effects on compounding when the market is volatile and moving sideway?

    • Jahaziah Lim

      Correct me if I am wrong in understanding how ETF works.

      “Each ETF has at least one Market Maker to buy/sell from investor throughout a trading day and thus, posing no liquidity issue.”

      I have been hearing news about how local ETFs are facing a liquidity issue, because there are only a few players buying and selling in the secondary market.

      So when I buy a local ETF from Bursa, does it mean that the market maker is crafting a basket of stocks for me, rather than me trading ETFs with another seller?

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