What is ETF?
Exchange-Traded Fund or ETF is a hybrid between shares and Unit Trusts. Just like Unit Trusts, ETF invests in a portfolio of shares, bonds, commodities or other assets. However, ETF is traded on the stock exchange (for example, Bursa) like shares.
Similarities between ETF and Unit Trust
ETF and Unit Trust are similar in the following ways:
- Diversification - With an investment into a single product, you gain access to a basket of shares, bonds, commodities, etc
- Management Fee - Just like Unit Trust, the Asset Management Companies charges an annual management fee for managing the investments. However, ETF's management fees are much lower as compared to Unit Trust.
Similarities between ETF and shares
ETF is traded on the exchange like shares which means:
- Trading - You will need a trading account with a broker to trade and you can trade on margin
- Pricing - ETF can be bought and sold on the same day with a known price
- Settlement - ETF is settled on T + 2 just like shares
- Trading Fees - You pay brokerage fee, *stamp duty and clearing fee instead of sales charge
Difference between ETF and Unit Trust
When you invest in Unit Trust, the Fund Manager will actively pick stocks / bonds / any other assets and monitors the market with an objective to deliver better returns as compared to a benchmark. In contrast, ETF is not meant to deliver better returns than a benchmark but instead seeks to track the benchmark's performance (returns). As such, ETF is called an Index Tracker. This means that the Fund Manager will invest in stocks that make up the index as well as to mirror the weightage of each stock as per the index.
Why buy ETF when I can easily buy the stocks that make up the index?
In order to buy all the stocks that make up the index and in its weightage accordingly, one would require a huge capital. The beauty about ETF is that the Fund Manager pools capital from many investors to invest in the stocks of the index and break them into smaller fractions so you can own them with a small capital.
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