Table of Contents
What is ETF?
ETF stands for “Exchange-Traded Fund.” An ETF is a type of investment fund and exchange-traded product, which combines features of both mutual funds and stocks.
ETF vs mutual fund vs index fund
ETFs: Trade on stock exchanges throughout the trading day, and their prices can fluctuate in real-time based on supply and demand. It combines the features of a mutual fund and a stock.
Mutual Funds: Traded through mutual fund companies, do not have intraday pricing or real-time trading.
Index funds: An index fund is a type of mutual fund that aims to replicate the performance of a specific market index, such as the S&P 500.
ETF listed in bursa Malaysia
Here is the ETFs listed in Bursa Malaysia. Among them, FTSE Bursa Malaysia KLCI Index tracks KLSE index. However based on the past records of KLSE index, it is a bad idea to invest in KLSE-linked ETF.
Top three ETFs
Here are the top three ETFs based on market capitalization.
- SPDR S&P 500 ETF Trust (SPY)
- iShares Core S&P 500 ETF (IVV)
- Vanguard S&P 500 ETF (VOO)
Advantages of investing in ETF
- Diversification: ETFs typically hold a basket of securities, providing instant diversification. This diversification helps spread risk across multiple assets, reducing the impact of poor performance from any individual stock or bond.
- Liquidity: ETFs are traded on stock exchanges like individual stocks. This means they can be bought or sold throughout the trading day at market prices. The liquidity of ETFs allows investors to enter or exit positions quickly.
- Low Expense Ratios: ETFs often have lower expense ratios compared to actively managed mutual funds. This cost efficiency is attributed to the passive management style of many ETFs, which aim to track the performance of an index rather than relying on active stock selection.
- Lower Investment Minimums:ETFs can be bought in increments of one share, making them accessible to investors with varying levels of capital. This contrasts with some mutual funds that may have minimum investment requirements.
Recommended ETFs and their comparison
| Name | Code | Index | Expense Ratio | Weighting | 10 years CAGR (ex div) |
| SPDR S&P 500 ETF Trust | SPY | S&P 500 | 0.10% | Track S&P 500 | 14.73% |
| Vanguard S&P 500 | VOO | S&P 500 | 0.03% | Track S&P 500 | 14.81% |
| Ishares Core S&P 500 | IVV | S&P 500 | 0.03% | Track S&P 500 | 14.82% |
| Invesco NASDAQ 100 ETF | QQQM | NASDAQ | 0.15% | Track NASDAQ | 9.61% (3 years) |
| Invesco QQQ Trust | QQQ | NASDAQ | 0.20% | Track NASDAQ | 21.43% |
| Direxion NASDAQ-100 Equal Weighted Index Shares | QQQE | NASDAQ | 0.35% | Equal weighted | 15.88% |
Notes:
- Resource is taken from www.financecharts.com in Jan 2024.
- CAGR is only indicative. It varies with time based on the current price of the ETFs.
- QQQM return rate is from the past 3 years only, because it was only launched in the late 2020.
S&P 500 vs NASDAQ ETF
Basically NASDAQ is more volatile compared to S&P500, but its average return rate over the past 10 years is better. So I would say choice of the two depends on one’s risk taking appetite and the target return rate.
How to trade ETFs in Malaysia
ETFs are traded on stock exchange. I personally prefer S&500 and NASDAQ ETFs, and they can be traded with any stock broker that provide access to US stock market. Myself uses Rakuten trade, more information can be found on the resource page.
Interesting story: Warren Buffett’s bet against hedge fund using ETF
In 2008, Warren Buffett issued a challenge to the hedge fund industry, which in his view charged exorbitant fees that the funds’ performances couldn’t justify. Protégé Partners LLC accepted, and the two parties placed a million-dollar bet.
Buffett has won the bet, Ted Seides wrote in a Bloomberg op-ed in May. The Protégé co-founder, who left in the fund in 2015, conceded defeat ahead of the contest’s scheduled wrap-up on December 31, 2017, writing, “for all intents and purposes, the game is over. I lost.”
Buffett’s ultimately successful contention was that, including fees, costs and expenses, an S&P 500 index fund would outperform a hand-picked portfolio of hedge funds over 10 years.
Final Thoughts
In conclusion, emergency of Exchange-Traded Funds (ETFs) benefits retail investors, particularly those who lack the expertise or time to construct and monitor their own investment portfolios. This is especially true for investors outside the United States, such as Malaysians, who may find it challenging to familiarize themselves with each individual U.S. company, barring the mega caps.
Among the ETFs, I would say S&P 500 and NASDAQ ETFs are two of the most popular.
S&P 500 contains the best 500 listed companies in the US. Its growth trajectory is intrinsically linked to the overall expansion of the U.S. economy over the long term.
Conversely, the NASDAQ ETF focuses on the top technology companies globally. One key advantage of investing in NASDAQ lies in its periodical inclusion and exclusion. Companies losing competitiveness are ousted, making room for rising stars as the technology sector continually evolves. This dynamic nature lets retain investor keeping pace with technological advancement, alleviating the burden to stay abreast of the latest trends in the sector.
In essence, for retail investors seeking a hassle-free and diversified approach to investing, ETFs like the S&P 500 and NASDAQ offer a compelling solution, while minimizing the complexities associated with individual stock selection and monitoring.