An Exchange Traded Fund or ETF is an open-ended, index-tracking unit trust fund.

Generally, the principal objective of an ETF is to track or replicate the performance of a benchmark index.

An ETF provides investors, in a single transaction, a cost-efficient and convenient way to gain exposure to the basket of securities represented in the index.

Unlike other unit trust funds, an ETF’s units are listed and traded on a stock exchange and are bought and sold during trading hours just like shares.

The Manager: Manages/Administers the ETF in line with the trust deed and securities laws.

The Trustee: Acts as custodian of an ETF’s assets.  It also ensures ETF is administered in line with the trust deed and securities laws.

The Participating Dealer: Performs or facilitates in-kind creation and redemption of ETF units. It can also act as a liquidity provider to facilitate the trading of ETF units on the stock exchange.

The other Liquidity Providers (if any): Aid in providing liquidity to the ETF.

The Investors: Invest in ETF units via their brokers.

New ETF units are created via “in-kind” creation by participating dealers and not through cash subscriptions.

ETFs are essentially unit trust funds that are listed and traded on a stock exchange. They are open-ended with a unique “in-kind” creation and redemption mechanism supported by participating dealers and liquidity providers.

The main difference between an ETF and a unit trust fund is in the manner their units are bought and sold. Since ETFs are listed, their units can be bought and sold during stock exchange trading hours. Investors buy and sell ETF units through their stockbrokers rather than through unit trust agents or financial planners.

Unlike unit trust funds, new ETF units are not normally issued through cash subscriptions but via “in-kind” creation by participating dealers. Participating dealers, in turn, also function as, or work with, appointed liquidity providers to supply new units to investors or buy up excess supply from investors on the stock exchange.

Similar to other unit trust funds, the assets of an ETF are required by regulations to be placed under the custody of an approved trustee.

Other differences between an ETF and a Unit Trust Fund (UTF):

	ETF	Unit Trust
Diversification	√	√
Transparency	√	Less transparent
Fund Information	Market price and trading activity data readily available on Bursa Malaysia’s website or via brokers	Information available from the fund manager and fund’s appointed agents
Liquidity	√	Less liquid
Entry Fee	Brokerage fee, clearing fee and stamp duty are applicable when trading on Bursa Securities	3% - 5%  (for equity fund)
Management Fee	0.4% - 0.5% p.a. of the NAV	0.75% - 5% p.a. of the NAV
Purchase Settlement	T+3 (if through brokers)	Upfront
Trade Via	Brokers or participating dealers	Agent
Daily Trading Period	May change throughout the day	Fixed throughout the day

An Islamic ETF tracks a benchmark index comprised wholly of constituent securities which are Shariah compliant whereas a conventional ETF may track any benchmark index regardless of the Shariah status of its constituents.

An Islamic ETF will be managed under the Shariah principle and guidelines, and overseen by an appointed Shariah advisor/committee.

The Shariah advisor/committee will conduct regular reviews and audits on an Islamic ETF to ensure strict compliance with the Shariah principles and practices.

The following diagram depicts the general structure of an Islamic ETF:

Investing in an index is like investing in a group of securities that represent the composition of a broad stock market or stock industry sector. It provides the investor with performance of the broad market or sector.

Convenience – ETF offers investors an opportunity to gain immediate exposure to the securities that underlie its benchmark.

Accessibility – The mode of trading an ETF unit is no different than that of shares, whereby investors are able to buy and sell units of an ETF in board lots (100 if the ETF is traded on Bursa Malaysia Securities Berhad) at anytime during trading hours.

Transparency – Investors can readily access real time information such as prices and fund information, and as such are able to regularly monitor their investment throughout the day.

Lower cost – ETFs are passively managed funds and therefore incur lower management fees and transaction costs as opposed to funds that are actively managed.

Similar to investing in stocks, investors could experience market risk where there are fluctuations in securities prices. Hence, an ETF may have similar ups and downs as its performance may be directly affected by the performance of its component securities represented in the benchmark index.

Risk of tracking error where the performance of the ETF is not representative of the performance of the benchmark index.

An ETF offers two different sources of liquidity – traditional liquidity as measured by secondary market trading volume, and liquidity provided by creation and redemption process to match investors’ demand, enabling both large and small orders to be “filled” during trading day. Therefore, it is possible for ETF with low trading volume to still be liquid.

The investment returns of an ETF generally correspond to the performance of its benchmark index. Whether an ETF pays dividends or not depends among others on its distribution policy.

This would depend on the investment objective and strategy of the investors. Investing in an ETF is like investing in a stock. You can trade actively in the short term, or you can hold for long-term investment.

Just like trading stocks, an investor can trade in an ETF through a stockbroker. In Malaysia, this would mean having a Central Depository System (CDS) account and a trading account. Any buying and selling of ETF units can be executed through any of Bursa Malaysia Participating Organisations during trading hours.

The units of an ETF are listed on the stock exchange and traded during trading hours, making it easy for investors to buy or sell an ETF.

In Malaysia, the ETFs are traded in board lots of 100 units.

Similar to buying and selling of stocks, investors need to pay brokerage fee, stamp duty and clearing fees.  

Similar to any ordinary shares listed on the stock exchange. In Malaysia, it is settled no later than three market days after the transaction date (i.e. T+3).

The market price of ETF is available from the stock exchange where it is listed during normal trading hours. Investors can also obtain similar information from their brokers and stock quotation systems.

The index provider would periodically re-examine which securities to include or omit from the index and this is done according to the rules set by the provider. This method is known as rebalancing and the purpose is to ensure that the index constituents are consistently assessed on their suitability and relevance to the index’s overall objective.