Exchange traded funds are more efficient in terms of cost of investment
WITH the current low interest-rate environment coupled with the volatility in the market, the cost of investment has become a crucial factor in determining a successful investment.
While there are many instruments in the market, one of the better options for investors in the current challenging market scenario amid low interest rates is the exchange traded funds (ETFs) due to its cost efficiency. It is also suitable for investors who are savvy in timing the market.
i-VCAP Management Sdn Bhd chief executive officer Mahdzir Othman tells StarBizWeek that based on a study in the US, only about 15% of the actively-managed funds, i.e. mutual funds or unit trusts, had outperformed their respective benchmark market index over the long term after factoring in the costs of investment.
“This meant that investors in a majority of the funds failed to obtain net returns that are above the benchmark market performance as a result of their costs of investing – sales/exit charges – even if the fund outperformed,” he says.
Syariah ETF issuer
i-VCAP, which is a wholly-owned subsidiary of ValueCap Sdn Bhd, is currently the largest syariah ETF issuer in the world. It has four funds out of the eight ETFs listed on Bursa Malaysia.
He adds that while unit trust is a viable investment option which much depends on the skills of the fund manager, an ETF is relatively more efficient in terms of the cost of investment while investors have full control of their investment.
“For example, for a person to invest in an ETF, the charges, ie brokerage fee, is around 0.2% (maximum 0.7%) and there are no upfront charges. For unit trust, there is an upfront sales charge of up to 5%. Furthermore, the management fee of an ETF is less than 1% while for unit trust, it is higher with most around 1.5% to 2%. The management fee of an ETF is lower as it is passively managed as the ETF’s main objective is to track closely the performance of its benchmark index,” he says.
Investors have to ensure that the net returns after deducting various expenses have to at least match the risk-free rate, i.e. fixed deposit rates to ensure sound investments, he notes. ETFs have yet to find a strong footing in Malaysia even though they are gaining traction. The Malaysian ETF sector has experienced positive growth of 66% in terms of total volume, with 28.9 million units being traded on Bursa in 2015 compared to 17.4 million units in the previous year, he says, noting that on a global perspective, the instrument is the fastest growing investment product with close to US$3 trillion in total fund size. Total assets under management for ETFs in Malaysia stood at RM1.71bil last year compared with RM1.01bil in 2014.
An ETF is a hybrid instrument which has combined characteristics of unit trust and stock and is listed on the exchange, hence allowing an investor to trade – buy and sell – the instrument on a daily basis. It tracks either an index, a commodity or a basket of assets in general.
According to Mahdzir, unlike investing in a particular stock, ETFs have lower risk in that the risk is evenly spread out as they consist of a basket of stocks with different exposures, locally and/or regionally, and at the same time gives investors full control of their investments.
Elaborating on this, he says if one were to buy a specific stock, there is a risk associated with that stock should the market dynamics change and impact the company, hence a higher risk for an investor. He adds that stocks my give higher returns than an ETF but will be subject to strong volatility.
Therefore, for investors who are savvy in timing the market and at the same time hesitant to invest directly into the stock market, probably due to time constraint given the volatility, investing in an ETF is a better choice due to the reasons above.
As for syariah ETFs compared with conventional ETFs, Mahdzir says investing in the former have proven to provide more stable returns compared to the latter over the long term. He says for i-VCAP’s ETFs, the funds do not invest in non-syariah compliant operating companies such as gaming, breweries and conventional financial stocks. Further screening also excludes highly leveraged stocks.
There is also a growing trend, he says, of people investing in ethical investments of which syariah products can be deemed as one, given investors’ preference for responsible investing while at the same time in search of stable returns in the long run.
On the company’s ETF performance, he says it has four syariah ETFs with different exposures and performances.
For example, the MyETF Dow Jones Islamic Market Malaysia Titans 25 registered a 1.75% gain in 2015 while the MyETF MSCI Malaysia Islamic Dividend recorded 8.59% return, both considered commendable given the negative performance of the overall market during the year.
“Bear in mind, investors’ net return in these funds can be close to the price performance as there are minimal brokerage fee with no sales or entry charges,” he adds.
As for the company’s two newly-listed ETFs in 2015, My ETF MSCI South East Asia Dividend declined 6.7% since its listing in May, in line with the weak regional markets while MyETF Asia Pacific ex-Japan Agribusiness has yet to see major movement since it was only listed in December.
In February this year, three ETFs (with the exception of MyETF Asia Pacific ex-Japan Agribusiness) declared income distributions to their unitholders which were mainly derived from the funds’ dividend income during the year.
“Despite the slow movement, investors can generate attractive returns through ETFs with minimal hassle and costs if they are savvy enough in terms of market timing and the type of ETFs that they choose,” he adds.