What the FBM KLCI etf has to offer
Published: 2009/07/11
Globally, ETFs are increasingly becoming popular as an alternative investment instrument.
According to Strategic Insight, global net sales of mutual funds (excluding ETFs) were minus US$6 billion (RM21.42 billion), while net sales of ETFs were positive US$7.7 billion (RM27.49 billion) during the first three months of 2009*(1).
A recent study also revealed that trading volume increased by 85 per cent from year-end 2007 to year-end 2008, on all exchange products in Asia, ex-Japan(*2).
Although ETFs are experiencing a growth in popularity across the world, these instruments are still new to many investors in Malaysia. The first equity ETF(*3) launched in the country is the FBM30etf (now known as FTSE Bursa Malaysia KLCI etf).
We would like to share with you some of the investing benefits of the fund and how you can use it to capture investment potential in the Malaysian stock market.
Investing in the FTSEBursa Malaysia KLCI etf (FBM KLCI etf *4)
* Buy Malaysia's top 30 stocks in one deal
FBM KLCI etf is designed to follow the performance of its benchmark index, FTSE Bursa Malaysia KLCI. "The Fund, as at end of last month, has given a year to date return of 22.61 per cent. The one year return is -7.37 per cent, in line with the index's performance of -6.62 (*3) per cent," said Datin Maznah Mahbob, chief executive officer, Funds Management Division of AmInvestment Group Bhd.
The index comprises the top 30 largest companies in the market. Hence, buying the fund will give investors the advantage of immediate exposure to the country's top 30 stocks which are representative of the Malaysian stock market.
Moreover, investors will also benefit from this cost-efficient tool as it is less costly than building a portfolio from multiple stock purchases.
* Cheaper way of investing
The cost of investing in the FBM KLCI etf is generally lower than an actively managed fund. This is because the fund is passively managed as compared to actively managed funds that involve frequent trading, thus generate higher transaction costs, which in the long run could diminish the fund's return.
For example, a unit trust fund may charge up to 1.5 per cent per annum on management fee(*3), which is much higher compared to the management fee of 0.50 per cent charged by FBM KLCI etf.
In addition, investors purchasing a unit trust fund may incur entry fees of up to 6 per cent, while the fund does not charge any entry fee. There is nominal brokerage and clearing fees.
* Transparency
With the fund, investors also have the advantage of easily accessing real-time information such as fund prices and fund information.
With the transparency that the fund offers, investors can regularly monitor and have an up-to-date valuation on their investment.
These help them to capitalise on market trends and also make informed trading decisions. "These endearing features are some of the main reasons why investors increasingly embrace ETFs as their choice of investment," noted Maznah.
* Liquidity
Since the FBM KLCI etf can be bought and sold throughout the trading day, it offers the same level of liquidity as any other stocks on the exchange.
Like any other ETF structure, the fund's liquidity is also enhanced by its unique creation and redemption process. Liquidity providers or participating dealers are appointed to provide liquidity for the creation of new units when demand is high or the redemption of units when demand slows.
The liquidity offered by the fund provides investors the flexibility to enter and exit the market easily and this enables them to capitalise on market opportunities.
* Solution for portfolio construction
Investors can also opt to use the fund as a core holding in investment strategies. They can leverage on the broad diversification and lower costs of the fund through the core holding and then add stocks, unit trust or other alternative investments to enhance their investment portfolio.
Maznah acknowledges that ETFs are most effective when used as tools for implementation of investment strategies.
She said, "Investors can take advantage of the ETF such as the FBM KLCI etf to construct portfolios that meet their respective investment requirements. When the fund is combined with other investment products, more sophisticated portfolios can be realised."
* Affordability
FBM KLCI etf is very affordable compare to stocks and unit trust. The minimum trading board lot size is 100 units. If the FTSE Bursa Malaysia KLCI is at 1,052.26, an investor who wants to buy the FBM KLCI etf only has to pay RM1.05 to buy the minimum lot, which means the investor has to only fork out RM105 to buy the ETF. The initial investment for unit trusts start from RM1,000.
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