The convenience of investing, flexible market access, diversification options, and a low fees tructure have contributed to the adoption of Exchange Traded Funds (ETF) by individual investors, robo-advisers, wealth planners, and institutions as part of their investment portfolios.
ETFs have become popular, and that's not great news for actively managed unit trust. The number of people choosing ETFs and indexed unit trust over actively managed ones is going up, and it doesn't look like it's going to change soon. The big question is how much of the market will be taken over by these passive investments. The market expected that at least two thirds of the market would be taken by them.
As its name implies, Exchange Traded Funds are investment funds that trade on the stock exchange. Whilst it is a pool investment instrument like a unit trust, it differs in its investment strategy by tracking a specific index. Thus, through a single ETF trade, an investor gains diversified exposure to all the constituents of the corresponding index. The index constituents are published publicly every day, giving ETF investors the appeal of transparency.
INDEX - The Kuala Lumpur Composite Index, Standard & Poor's 500, and Dow Jones Islamic Market U.S. Titans 50 are examples of indices. An ETF tracking an index aims to mimic the composition and performance of the identified index.
When a company in the ETF index constituent performs poorly, it is replaced with a better performing one by the index provider, following the index criteria. This transition occurs seamlessly, requiring no effort from investors. It reflects the dynamic nature of ETFs, offering a hands-off yet strategic approach for navigating changing market conditions. This periodic review process of the index is known as Index Rebalancing.
| ETFs | Unit Trust Funds | Stocks | |
|---|---|---|---|
| Buy / Sell | Traded via broker on a public market | Sold by agents through private channels | Traded via broker on a public market |
| Investing Objective | To match the performance of an index, the ETF’s fund manager will ensure the alignment between the ETF’s return and the index it follows. | To outperform a selected benchmark using the capability of the fund management company and its fund managers’ skills | To find winning stocks, investors select stocks individually based on their preferences. |
| Management Type | Passively Managed | Actively Managed | - |
| Diversification | Yes | Yes | - |
| Real-time | Yes, continuous trading and pricing throughout the trading day. | No | Yes, continuous trading and pricing throughout the trading day. |
| Holding Transparency | Reported daily | Reported monthly | Reported daily |
| Annual Management Fees | Usually is less than 1% | Can be up to 5% | - |
| Entry Fees | Usually is less than 1%for brokerage fee, clearing fee, and stamp duty | Up to 5.5% of upfront sales fee | Usually is less than 1% for brokerage fee, clearing fee, and stamp duty |
| Minimum Investment Amount | No minimum investment amount | Most Unit Trust Funds require an initial minimum investment of RM1,000. | No minimum investment amount |