Exchange Traded Funds (ETFs) are securities that track an index, commodity, sector or group of assets such as open -ended investments but are traded on exchanges such as stocks.
Since ETFs are traded in a market like stocks, ETFs are priced and traded throughout the day. Thus, ETFs combine the features of open-ended funds and stocks.
ETFs have several advantages such as having low management fees and no upfront fees. In addition, investors can easily redeem units and get cash by the third day of the market after the trading date.
Investors also know what to buy because the underlying securities are exposed and prices are available in real time throughout the trading day.
You can also invest in the securities you want with only a small capital. Unlike Unit Trust Funds, ETFs do not have a minimum investment amount while most unit trust funds require a minimum initial investment of RM1,000.
Like stock trading, you need to have a Central Deposit System (CDS) account and a trading account managed by a broker. You can sell or buy ETFs through brokers, remisiers and through online trading during trading sessions.
How is the market price of an ETF determined? There are two types of prices for an ETF. The trading price is the bid and query price displayed on the trading screen. ETF trading prices are determined by demand and supply in the market.
Another type of ETF market price is Net Asset Value (NAV). The NAV of an ETF is its total assets after deducting liabilities. Typically, ETF NAV is calculated by the ETF fund manager.
Most ETFs have Designated Market Determinants to provide bid prices to ensure investors can enter and exit the market throughout the day.
There are two types of returns in ETFs. The first is capital income. Investors can trade ETFs like stocks by buying them at a low price and selling them at a higher price to make a profit.
The second is dividends. Most ETFs pay dividends to their fund holders either semi -annually or annually. Fund managers typically receive dividends from securities that belong to the ETF group.
Dividends are usually distributed to ETF unitholders after deducting management fees.
ETFs also have risks, similar to stock investments, of being subject to market fluctuations. The performance of an ETF may also be directly affected by the performance of its component stocks or bonds.
Since ETFs have become increasingly popular among investors, many new funds have been created, causing the trading volume of an ETF to be low. As a result, investors may not be able to buy and sell low -value ETF shares easily.
Some ETFs rely on untested portfolio models in different market conditions and can result in unusual inflows as well as outflows from funds, which negatively impact market stability.
