It is always important to understand the risk of the index you are investing in. Risks vary by industry, country and security amongst others. For example, an ETF tracking a Malaysian bond index has a lower risk profile compared to one tracking a Malaysian equity (stock) index. The type of ETF you invest in should depend on the level of risk you are willing to take.

There are 3 types of ETFs and they can be roughly categorized as having these risk levels:

Fixed income or bonds – these carry the lowest amount of risk because they invest primarily in bonds (like government or corporate bonds) and money market instruments (investments that generate profit through interest rates).

Commodity – the risk level of these ETFs depends on the commodity.

Equity – these carry the highest amount of risk because they invest money in the shares of companies, and these can sometimes be volatile (meaning they can go up and down frequently). Historically, evidence suggests you might expect a higher return.

Below is a complete list of ETFs by type available in Malaysia:

It’s usually quite difficult to understand which sector or commodities are going to do better. This is especially true if you don’t have a strong understanding of the market and the sectors that ETFs are concentrated in.

Generally, a safer investment is for you to invest in large capitalisation funds compared to small capitalisation funds. What’s the difference? Well a large cap fund only includes companies with high market capitalisation (basically the companies with the highest value). In comparison small capitalisation funds have companies with low market capitalisation but might have higher potential growth.

Pop up large cap

Pop up small cap

If you are a conservative investor or if you have less knowledge about the market:

• Choose ETFs that track a large part of the stock exchange e.g., instead of choosing an ETF that only tracks a very specific sector, choose one that tracks the KLCI
• Choose ETFs that are focused on large cap companies or in other words the largest companies by market capitalisation

If you are a more aggressive or knowledgeable investor

• You could choose ETFs that are focused on a specific sector (e.g., gold, tech, countries (China, US), healthcare)
• Or you could choose ETFs that are focused on small to medium cap companies. The appealing feature of small and medium cap funds is that, if things go well, these companies are expected to grow and increase profits which could give you higher returns on your fund. However, small caps are riskier and thus you will likely see more ups and downs with your returns.