Why did ETFs come about?
Well, in the western markets, most fund managers that actively manage investments have generally underperformed compared to the entire stock market over a long period of time.
People realised that many unit trusts or mutual funds were performing worse than the stock market indices they were investing in. So, if you were to invest in all the stocks listed on the stock exchange, you’d probably still get better returns than if you paid someone to only choose the ‘best’ stocks to invest in for you. This got investors questioning whether it’s worth paying for professional fund managers to invest for them. That’s how we got ETFs.
But I’ve never heard of them…
Well in Malaysia, the number of ETFs available is limited but we can expect more ETFs soon with the Securities Commission and Bursa Malaysia recently revising their guidelines on ETFs. Globally, more people are buying ETFs – the in 2000, there were less than $100 billion in ETF assets and now it counts for $4.7 trillion and an ever-expanding number of products.
So what do I really need to know about them?
ETFs offer diversification just like unit trusts
Lower fees than unit trusts
What sets ETFs apart from unit trusts is that there is no fund manager or team that is actively making investment decisions. As such ETFs can generally charge lower fees than unit trusts
ETFs are traded on the stock exchange
ETFs are bought and sold the same way you’d buy or sell shares.
Costly to invest small amounts in ETFs
Every time you buy ETFs, you will need to pay a brokerage fee which is a flat fee. To minimise the impact of fees on your returns, you’ll want to invest larger amounts.