Complete guide to Exchange Traded Funds (ETFs) in Malaysia

Exchange-Traded Funds (ETFs) have transformed investing by offering easy access to a wide variety of assets, including stocks, bonds, commodities, and indices, all within a single fund. Whether you’re looking to invest in Malaysian markets through Bursa Malaysia or gain exposure to global markets like the S&P 500, ETFs provide a flexible and cost-effective way to diversify your portfolio. 

Traded on stock exchanges worldwide, ETFs allow investors to buy and sell throughout the trading day with real-time pricing, making them an appealing choice for both new and experienced investors.

The global ETF market continues to thrive, managing approximately $13.78 trillion in assets as of October 2024. Throughout 2024, ETFs attracted $1.63 trillion in net inflows, reflecting their growing popularity among investors worldwide.

In Malaysia, the ETF market is also gaining momentum. In 2024, Malaysia’s ETF total volume traded grew by 18.3% year-over-year to 133.1 million units, while total value traded surged by 40.7% year-over-year to RM227.3 million. 

This growth highlights the increasing interest among Malaysian and investors around the world in using ETFs for diversification and wealth building. Selecting the right ETF involves more than just picking the most popular option. Investors need to consider their financial goals, risk appetite, and market conditions, along with key factors like fees, liquidity, and the underlying index or assets. 

What is an Exchange-Traded Fund (ETF)?

An Exchange-Traded Fund (ETF) is an open-ended investment fund designed to track the performance of a specific underlying asset, such as an index, commodity, bond, or other securities. Unlike mutual funds, ETFs trade on stock exchanges, allowing investors to buy and sell shares throughout the trading day at market prices, similar to individual stocks.

ETFs offer a cost-effective way to invest, as they typically have lower fees compared to actively managed funds. Instead of purchasing each underlying asset individually, investors gain access to a diversified portfolio through a single ETF, reducing both cost and complexity.

In Malaysia, ETFs listed on Bursa Malaysia provide exposure to a wide range of markets and asset classes, from U.S. and China equities to ASEAN markets, bonds, and even commodities like gold. This versatility allows Malaysian investors to diversify their portfolios both locally and globally with ease.

Combining the diversification benefits of unit trusts with the flexibility and liquidity of stocks, ETFs present an efficient investment option for building wealth over time

What is an index?

An index is a collection of securities—such as stocks, bonds, or commodities—that represents the overall performance of a specific market or sector. It serves as a benchmark to track the price movements and trends within that market, providing investors with a snapshot of its performance over time.

For example, the FTSE Bursa Malaysia KLCI tracks the top 30 companies listed on Bursa Malaysia, reflecting the health and direction of the Malaysian stock market. Similarly, global indices like the S&P 500 represent the performance of 500 leading companies in the U.S., offering insight into the broader U.S. market.

Indices play a crucial role in ETFs, as many ETFs are designed to replicate the performance of these indices, allowing investors to gain exposure to an entire market or sector through a single investment.

ETFs listed on Bursa Malaysia

ETFs combine the benefits of stocks, unit trusts, and index funds, offering diversification, flexibility, and cost efficiency. Traded like stocks, they provide real-time pricing, liquidity, and transparency, with low fees and no upfront charges. Investors can easily access a wide range of markets and asset classes, from Malaysian equities to global indices, bonds, and commodities. Below is a comparison of ETFs available on Bursa Malaysia.

Top ETFs not listed on Bursa Malaysia for global diversification

Investing in ETFs beyond Bursa Malaysia offers Malaysian investors exposure to global markets, sectors, and asset classes. These international ETFs allow for diversification into U.S. equities, emerging markets, bonds, commodities, and more. With well-established fund managers and broad market coverage, these ETFs provide opportunities for portfolio growth and risk management across various economic cycles.

Below is a comparison of popular ETFs not listed on Bursa Malaysia:

Where and how to buy ETFs?

Investing in ETFs is straightforward, but the method you choose depends on whether you’re looking to invest in local ETFs listed on Bursa Malaysia or global ETFs from international markets. Here are the main ways to buy ETFs in Malaysia:

1. Through the Malaysian stock market

Local ETFs are traded on Bursa Malaysia, just like individual stocks. To invest, you’ll need to open a stock trading account with a brokerage that provides access to Bursa Malaysia. Once your account is set up, you can search for the ETF ticker, place a buy order, and start investing. 

2. Through an international broker

Malaysia offers a limited number of ETFs, but global markets provide access to thousands of ETFs across different sectors, regions, and asset classes. Investors can trade U.S. and other foreign ETFs through local brokers, but these transactions often come with high fees, typically around US$25 per trade. 

A more cost-effective option is to use international brokers like Moomoo, Webull that are SEC approved, which offer lower commissions and, in some cases, even 0% fees for buying U.S. ETFs.

3. Through a robo-advisor like StashAway

For investors looking for a hands-off approach to ETF investing, StashAway General Investing offers a well-diversified portfolio with global exposure across multiple asset classes, including equities, bonds, and commodities. 

Using its proprietary Economic Regime-based Asset Allocation (ERAA®) framework, StashAway dynamically adjusts portfolios based on economic conditions to balance growth and risk effectively.

StashAway’s General Investing portfolios include a carefully selected mix of 24 ETFs from top fund managers like iShares, Vanguard, SPDR, and JPMorgan. This broad diversification ensures that investors are exposed to various regions, industries, and asset types, reducing risk while enhancing potential returns.

With low fees ranging from 0.2% to 0.8%, automated portfolio rebalancing, and global market access, StashAway General Investing offers an accessible and cost-effective way to invest in ETFs without managing individual holdings, making it ideal for both beginner and experienced investors.

Why ETF fees matter and how they impact your returns

One of the biggest advantages of ETFs is their cost-effectiveness. Unlike actively managed unit trust funds, ETFs typically have lower fees because they are passively managed and designed to track an index. However, while ETFs are generally cheaper, it’s still important to understand the fees involved, as they can have a significant impact on your long-term returns.

When buying ETFs on the stock market, investors must pay a brokerage fee, which varies depending on the broker. This fee is usually between 0.02% and 1% of the transaction value. Additionally, ETFs have an annual expense ratio, which covers management fees, trustee fees, and other administrative costs. In Malaysia, this typically ranges from 0.08% to 1.09%, significantly lower than unit trust funds, which can have an expense ratio of around 1.9% or higher.

While these percentages may seem small, they add up over time. A higher expense ratio can eat into your investment gains, affecting the overall growth of your portfolio. The table below illustrates how different expense ratios can impact portfolio value over the long term, assuming a 7% annual return and an initial investment of RM10,000:

As the table shows, even a small difference in fees can result in a significant difference in returns over the long run. This doesn’t mean you should always choose the lowest-cost investment—paying higher fees for a unit trust fund may be worthwhile if you want to rely on a fund manager’s expertise. However, it does mean that investors should carefully consider how fees impact their portfolio’s growth over time.

What are the differences between ETFs and Unit Trust Funds?

While both ETFs and unit trust funds provide access to a diversified portfolio of assets, they differ significantly in structure, management, and cost. The table below highlights the key differences between ETFs and unit trust funds:

Frequently Asked Questions (FAQs) About ETFs

What determines the price of an ETF?

The price of an ETF is primarily determined by the value of its underlying assets. Since ETFs track an index or a basket of securities, their price fluctuates throughout the trading day based on supply and demand, as well as changes in the value of the assets they hold. Market sentiment, liquidity, and broader economic conditions can also influence an ETF’s market price.

Do ETFs pay dividends?

Yes, some ETFs pay dividends, depending on the underlying assets they hold. If the ETF invests in dividend-paying stocks or interest-bearing bonds, it may distribute dividends to investors. However, some ETFs reinvest dividends instead of paying them out. Investors should check the fund’s distribution policy before investing.

How are transactions in ETFs settled?

ETF transactions follow the T+2 settlement cycle, meaning that when an ETF is bought or sold, the transaction is finalized two business days after the trade date. This is the same settlement process used for regular stocks on Bursa Malaysia.

Is there any risk in investing in ETFs?

Like all investments, ETFs carry risks. The primary risks include market risk, liquidity risk, and tracking error risk. Market risk arises when the value of the ETF fluctuates with changes in the financial markets. Liquidity risk refers to how easily an ETF can be bought or sold without significantly impacting its price. Tracking error risk occurs when an ETF does not perfectly replicate the performance of its underlying index due to fees, management strategies, or market conditions.

What should I do before investing in an ETF?

Before investing in an ETF, investors should:

• Understand the ETF’s investment objective, underlying assets, and risks.
• Compare the ETF’s expense ratio, liquidity, and historical performance.
• Consider the fund manager’s reputation and track record.
• Evaluate whether the ETF aligns with their investment goals and risk tolerance.

What is the Indicative Optimized Portfolio Value (IOPV) for an ETF?

The IOPV is an estimated real-time value of an ETF’s net asset value (NAV) during the trading day. It is updated frequently to give investors an idea of the fair value of the ETF’s holdings. The IOPV helps traders make informed decisions by comparing the market price of an ETF with its estimated fair value.

What is the tick size for ETFs?

The tick size refers to the minimum price movement of an ETF during trading. On Bursa Malaysia, the tick size for ETFs varies depending on their price range. Generally, ETFs with a lower price have smaller tick sizes, allowing for more granular price movements, while higher-priced ETFs have larger tick sizes.

What are the returns for investing in an ETF?

ETF returns depend on the performance of the underlying securities it tracks. Some ETFs provide capital appreciation, while others offer dividend payouts. Since ETFs mirror the performance of an index, they typically provide long-term returns that align with market movements, minus fees and expenses.

Does an ETF have a prospectus?

Yes, all ETFs have a prospectus, which provides detailed information about the fund’s investment strategy, holdings, fees, risks, and historical performance. Investors should review the prospectus before investing to understand what they are buying.

How is the market price of an ETF determined?

The market price of an ETF is influenced by the NAV of its underlying assets and real-time trading activity. Since ETFs trade like stocks, their price can fluctuate above or below the NAV due to supply and demand, investor sentiment, and market conditions.

What is the role of a market maker in ETFs?

A market maker plays a crucial role in ensuring liquidity and efficient pricing for ETFs. They do this by continuously offering to buy and sell ETF shares, helping to minimize the bid-ask spread. Market makers also ensure that ETFs trade at prices close to their NAV by engaging in arbitrage when discrepancies arise.