Malaysia Etf Investment: A Beginner's Guide

Exchange-Traded Funds (ETFs) are an open-ended investment fund that is listed and traded on stock exchanges. ETFs are similar to stocks in that they can be bought and sold during trading hours. They are also similar to mutual funds in that they are a collection of different types of investments. ETFs are a great way for investors to diversify their portfolios and gain exposure to a wide variety of markets and asset classes. There are several types of ETFs, including index ETFs, commodity ETFs, industry ETFs, and bond ETFs. Before investing in ETFs, it is important to do your due diligence and be aware of the fees and expenses involved.

How to open a trading account in Malaysia

To open a trading account in Malaysia, you'll need to follow these steps:

Step 1: Choose Between a Direct CDS Account or a Nominee Account

A Direct Central Depository System (CDS) account is like a registry that keeps a record of your stock holdings. When you buy shares of a public-listed company, they are credited to this account, and when you sell them, they are transferred out. A nominee account, on the other hand, means that your shares will be held by your bank or stock brokerage platform, although you will still be the owner. Your nominee will handle any paperwork related to owning these shares. If you're new to stock trading, a nominee account might be easier as the administrative tasks will be handled for you. However, if you want more control over your investments, a direct CDS account is a better option.

Step 2: Decide Between a Cash Account or a Margin Account

A cash account is simpler and only lets you invest using the money you have in your account. On the other hand, a margin account lets you borrow cash from your broker to buy shares, potentially increasing your gains but also your losses. If you're a beginner, it's generally recommended to go for a cash account to minimise your risk.

Step 3: Choose a Brokerage Platform

You'll want to consider the fees charged by the platform for executing transactions. You'll typically be charged once when you buy shares and once when you sell them. Some options for brokerage platforms in Malaysia include Affin Hwang Capital, Rakuten Trade, and iMoney.my.

Step 4: Open Your Account

To open an account, visit the website of your chosen broker and register online. They will usually ask for proof of identity (such as a passport or driving license), proof of address, bank account details, and latest bank statements or payslips. There may also be a small fee for opening your account. Once your application is approved, you can start trading.

Step 5: Open a Demat Account (if trading ETFs)

If you plan to trade Exchange Traded Funds (ETFs), you will also need to open a Demat account to hold the ETF units. A Demat account is a dematerialized account that holds financial securities such as equity in electronic form.

Step 6: Furnish Required Documents

For trading ETFs, you will need to provide documents such as proof of identity, proof of address, and bank account details.

Step 7: Start Trading

Once you have completed the above steps and your accounts are set up, you can begin buying and selling ETFs through your chosen platform.

The best online trading platforms or brokers

When it comes to investing in ETFs in Malaysia, there are a variety of online trading platforms and brokers to choose from. Here are some of the best options:

Moomoo

This platform offers commission-free stock and ETF trading, fast and easy account opening, quality analytical tools, and excellent education services. It also pays high interest on uninvested cash. The moomoo trading platform connects investors to international exchanges like the New York Stock Exchange, offering a wide range of investment opportunities. In terms of fees, moomoo charges platform fees of RM 3 per order for Malaysia stocks and $0.99 per order for US stocks, with no account maintenance, deposit minimum, or withdrawal charges.

XTB

XTB is a great option for beginners, offering commission-free stocks and ETFs for trades up to €100,000 per month. It provides free and fast deposit and withdrawal services, an easy and fast account opening process, and high interest on cash. XTB has a broad range of markets and asset classes and is suitable for both beginners and experienced traders.

Interactive Brokers

Interactive Brokers offers extremely low fees, a wide range of products, and many great research tools. It is considered safe and reliable, overseen by notable regulators. While it is not regulated by the Securities Commission Malaysia, it is fully legal in Malaysia.

TradeStation Global

TradeStation Global offers low stock and ETF fees, a wide range of products, and an easy-to-use web trading platform. It is one of the best international online brokers available to Malaysian residents.

Tickmill

Tickmill is an FCA-regulated broker that provides access to over 16,000 stocks for trading. It offers low forex fees and free deposit and withdrawal services, along with fast and easy account opening.

When choosing an online trading platform or broker, it's important to consider factors such as fees, the availability of educational resources, customer support, and the range of products offered. Be sure to compare different options and select the one that best aligns with your investment goals and risk tolerance.

The different types of ETFs

Exchange-Traded Funds (ETFs) are an open-ended investment fund that combines the features of an index fund and a stock. There are three main types of ETFs: equity ETFs, Leveraged & Inverse ETFs, and fixed-income & commodity ETFs.

Equity ETFs can be further divided into international ETFs, sector ETFs, dividend ETFs, and market-cap index ETFs. International ETFs invest in companies headquartered outside of the United States, while sector ETFs focus on companies in similar business areas or offering similar products and services. Dividend ETFs, meanwhile, invest in companies with a history of paying dividends to shareholders, and market-cap index ETFs select and weight stocks based on the size of each company's market capitalization.

Leveraged & Inverse ETFs are designed to produce targeted, multiple returns of the underlying index daily. Leveraged ETFs aim to amplify the returns of the index's daily performance, while inverse ETFs aim to provide a return that is the opposite of the index's daily performance.

Fixed-income & commodity ETFs include bond funds, which can focus on corporate, government, municipal, international, or global debt. Commodity ETFs invest in physical commodities such as natural resources, agricultural goods, and precious metals, either through direct investment or via futures contracts.

Other types of ETFs include real estate funds, which invest in real estate investment trusts (REITs), and currency ETFs, which track the performance of a single currency or a basket of multiple currencies.

How ETF prices are determined

The price of an ETF is determined by two factors: the underlying value of the asset, or Net Asset Value (NAV), and the market price of the ETF.

The Net Asset Value of an ETF is the assessed value of all of an ETF's underlying securities. It is calculated by adding up the value of all assets in the fund, including cash holdings, subtracting any liabilities, and then dividing that value by the number of outstanding shares in the ETF. The NAV is calculated at 4:00 pm Eastern Time after the markets close.

The market price of an ETF is the price at which investors can buy or sell it on an exchange. This price may differ from the NAV of the ETF at any given time, depending on demand and supply for the ETF. If there is heavy demand from buyers, the price of an ETF can increase above its NAV. Conversely, if there is heavy sell-side pressure, the price can dip below the NAV.

The creation-redemption mechanism of ETFs allows new ETF shares to be created to meet demand or redeemed to reduce supply as needed. This mechanism helps keep an ETF's market price in line with its fair value and limits severe premiums and discounts.

The price of an ETF can also deviate from its NAV due to changes in the supply or demand for an ETF at any single point in time. The market price will typically exceed the NAV if the fund is in high demand with low supply. The NAV will generally be higher if the fund has a high supply with little demand.

The pros and cons of investing in ETFs

Exchange-traded funds (ETFs) are a great addition to your portfolio if you're looking for an investment that's affordable, easy to manage, and allows you to invest in multiple assets at once. Here are some of the pros and cons of investing in ETFs, specifically in Malaysia.

Pros

• Low fees: ETFs are typically passively managed, tracking an index rather than selecting individual stocks. This results in lower fees, usually between 0.08% and 1.09% annually in Malaysia.
• Diversification: ETFs allow you to invest in many assets at once with little money, reducing the impact on your portfolio if any individual investment underperforms.
• Easy to buy and sell: As ETFs are traded on the stock market, it's quick and easy to buy and sell them, just like stocks.
• Passive investment strategy: ETFs are ideal for those who don't want to spend a lot of time picking out individual stocks as they are automatically selected for you.
• Lower annual management fees: ETFs generally have lower annual management fees compared to unit trusts, making them more economical to buy and maintain in the long run.
• Low investment threshold: ETFs have a low investment threshold, allowing anyone to start investing with a small amount of money.

Cons

• Limited control: You can't include or exclude specific stocks from an ETF, so you have less control over your portfolio.
• May not beat the market: ETFs usually match the performance of a market or a segment of it, so your returns may not outperform the market.
• Lower dividend yields: While there are dividend-paying ETFs, the yields may not be as high as owning individual stocks or a group of high-yielding stocks.
• Less diversification: Some sectors or foreign stocks may only offer large-cap stocks due to a narrow group of equities in the market index, limiting diversification.
• Higher costs: When compared to investing in a specific stock, ETFs may have higher costs due to management fees.
• Tax considerations: While dividends from ETFs are generally tax-free, overseas ETFs may be subject to taxes, such as the 30% withholding tax on US ETFs.

Overall, ETFs offer a range of benefits, including low fees, diversification, and ease of trading, but it's important to consider the potential drawbacks and tax implications before investing.

Frequently asked questions