What are the benefits of investing in ETFs?
Less risky than investing in individual shares
ETFs and unit trusts share one thing in common: they offer diversification. Unlike individual stocks, investing in ETFs is equivalent to investing in a basket of different securities.
Securities: Securities are financial assets that can be purchased as an investment. Examples of securities include stocks and bonds:
Let’s say you’re invested in an ETF that tracks an index of the largest 30 companies in Malaysia- an event that affected one company (like if one company’s CEOs didn’t manage the company so well) wouldn’t impact your investment as much as if you’d invested in just that one company. However, you’d still be exposed to risks that affect all Malaysian Companies like a natural disaster or a new tax ruling.
|⚠ But remember: depending on the type of ETF you buy; the risk levels may differ.|
Lower fees than unit trusts
ETFs are known for having lower fees than unit trusts because you’re not paying fund managers to actively manage your investments for you and there are no sales agents. Typically, ETF fees are less than 0.8% while unit trust fees can be up to 6% for upfront fees, 1-3% for management fees and there are also switching costs.
But because you buy ETFs on the stock market, you will still have to pay brokerage fees.
Let’s look at the impact of fees on your investment:
Imagine both an ETF and unit trust that delivers 6% returns annually but the unit trust charges you a 5% sales fee and 2% management fees every year while the ETF only charges fees of 0.8% annually.* If you invested RM1,000 in the beginning, what would the investment look like in 20 years? For Unit Trusts (higher fees), you would have made RM2,082. On the other hand, with ETFs (lower fees) you would have made RM 2,756.
*Does not consider brokerage fees
Note: EPF’s new i-invest means that if you invest through the platform, fees on unit trusts are significantly lower than buying it through an agent and are similar to fees charged if you buy ETFs. EPF has set a maximum cap of 0.5% on sales fees for their i-invest facility.