Investing in Exchange Traded Funds (ETFs). What are ETFs, pros & cons, and should you invest in ETFs.
Updated: Mar 15, 2017
What are Exchange Traded Funds (ETFs)?
ETFs are listed on the stock exchange. With an ETF, you buy a number of stocks/bonds/other investments which represent an index.
ETF Pros & Cons
- Diversification with a single purchase including regional and international diversification.
- Trading of ETFs anytime and immediately (as long as there is a willing buyer and seller) when the market is available for trading.
- Lower buying/annual fees compared to mutual funds/unit trusts.
- ETFs may pay dividends which are generally tax-free (in countries that have investment income taxes) until you sell.
- An index (which an ETF mirrors) generally outperforms the average stock investor.
“After I die, I would put my money into a super-simple, ultra-low-cost, index fund which tracks the 500 biggest companies in America — otherwise known as the S&P 500. I believe the long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions, or individuals — who employ high-fee managers” ~Warren Buffett
- ETFs although diversified can be volatile especially if the ETF focuses on a particular sector.
- Although lower fees (in Malaysia) than Unit Trusts, you still incur brokerage and other fees which can add up especially if you make many transactions.
- You may face difficulties trading in ETFs that are not heavily traded (re: low volume/liquidity) with not many buyers and sellers.
Buying an ETF
You incur costs like buying and selling stocks when buying an ETF, including brokerage commission, stamp duty and clearing fees.
Like shares, ETFs are traded in minimum lots of 100 units in Bursa Malaysia and as low as 1 unit in international markets.
Look for commission free/very low fee ETFs especially if you are planning to invest over time using dollar-cost averaging.
Should you invest in ETFs?
Questions you should ask before investing include:-
- What is your investment timeline and objectives?
- What is the investment objective and strategy of the ETF?
- What is the dividend policy (if any) for the ETF?
- What fees and charges will you be paying?
- How reputable and trustworthy is the company managing the ETF?
Malaysian ETFs generally have low trading volume.
In the United States, the SPDR S&P 500 ETF ($SPY) is the 2nd most actively traded fund in the whole world.
Ultimately, you as an investor need to make that call.
Working with a good Personal Finances Advisor will help you to make better decisions and avoid mistakes with personalized help based on your individual needs and profile.