18 December 2010

Understanding Exchange Traded Fund (ETF)

What is an Exchange-Traded Fund (ETF)?
An ETF is an open-ended investment fund listed and traded on a stock exchange, which aims to track the performance of an index and to provide access to a wide variety of markets and asset classes. By holding a basket of individual securities, an ETF allows an investor to expose to many companies or fixed income securities with one single trade.

Benefits of Investing in ETFs...
  • Prices are available throughout the day (according to trading time of Bursa Malaysia)
  • Flexibility and Liquidity, due to combination of trading on an exchange and the continuous offering of units
  • Transparent portfolio. Investors will know exactly what stocks they are investing in.
  • Diversification
  • Lower management costs as compared to mutual funds
How is the pricing of an ETF being set?
The market price of units in the ETF is subject to supply and demand. Although Net Asset Value (NAV) of the ETF will approximate the trading value of the underlying securities held plus any undistributed income, the trading price of units may differ from NAV per unit of ETF. Anyway, arbitrage will help to keep the traded price of an ETF in line with its underlying value.

Why invest in ETF?
  • Generally, an ETF uses indexing, or called "passive management"
  • An ETF trades like shares, but offers diversification and exposure similar to an index unit trust fund
  • It offers market level performance as it aims to match the performance of a specific index, net of fund expenses
  • It also has lower management fees and operating expenses
  • Stock selection and weightage is totally based on the index selected 
What are the differences between ETF and Unit Trust Fund?
Source: www.financemalaysia.blogspot.com


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