Imagine you need to buy groceries from the supermarket. Typically, you have to go to every section to buy what you need, which can take time – especially if you’re unfamiliar with the layout.

What if, at the entrance, the supermarket were to bundle all the things shoppers usually buy into one big package? A two-hour grocery trip would become a five-minute affair if you were happy with the package. It would have most of the things you need, and you could then spend your time doing something else.

Think of exchange-traded funds (ETFs) as that package. Basically, an ETF is a basket of securities that trades on an exchange just like a stock. It represents and tracks overall markets such as stock indexes, commodities, bonds and others.

And just like stocks, you can buy and sell an ETF in the market. In Malaysia, ETFs are listed on Bursa Malaysia. You can also buy them from overseas, but you might have to get a foreign broker to do so.

Here are four reasons why ETFs could be for you.

1. Provides diversification

Diversifying is important as it will protect your investments from risks and high losses. But for many, diversification is difficult as you will need to invest in at least 30 different stocks. You might not have enough money to do this.

An ETF solves that problem as it already contains a myriad of stocks in the portfolio of the fund it represents. For example, you might need about RM30,000 to buy different stocks but only RM1,000 to buy an ETF for the Kuala Lumpur Composite Index (KLCI).

2. Low effort

Learning about ETFs or monitoring their performance does not require too much effort. ETFs are constructed to mimic the overall markets’ performances; for example, the ETF for KLCI will usually offer the same returns as the overall KLCI market.

This also means you don’t have to monitor a specific company or investment. After investing in an ETS, you can opt to pay little attention it as it will follow the performance of its overall market.

3. Easy to buy and sell

Like stocks, ETFs are easily bought and sold on Bursa Malaysia. You can do so through local brokers, or international brokers for foreign ETFs.

There are even robo-advisors now that will help you invest in funds that resemble ETFs across Malaysian and international markets.

4. Low Fees

Annual fees for ETFs, which are charged by the investment manager, are usually below 1%, lower than unit-trust-fund fees of 1-2%.

So, what’s the catch?

Of course, like all investments, there are downsides to ETFs:

1. Risky and unpredictable

Depending on which markets they represent, ETFs can be unpredictable; for instance, if they were to track a risky and volatile asset class such as cryptocurrency.

2. Rarely beats the overall market

As an ETF matches the overall market, it won’t provide higher returns or outperform. For higher returns, you may need to take more risks by investing in an aggressive or DIY unit trust fund.

3. Lack of control

What the ETF invests in is out of your control: the investment manager will buy and sell to reflect a particular market. They will not take into account the investor’s feedback or suggestions.

How to invest

The most straightforward way is to open a stock trading account either with a local or international company. Malaysian ETFs can be bought through local brokerage, while foreign ETFs are typically managed by international brokers.

You can find the full list of brokers on Bursa Malaysia’s website. Remember that you will need the following documents to open one:

• NRIC or passport;
• bank statements;
• payslips and EPF statements (optional).

You will incur the typical fees when you invest in an ETF, including transaction and opening fees, stamp duty, and sales and services tax.

To find out which ETFs are available in Malaysia, refer to this list from Bursa Malaysia.

This article was written by Su-Wei Ho for MyPF. To simplify and grow your personal finances, follow MyPF on Facebook and Instagram.

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