Understanding ETF

Understanding ETF

Q: What is an exchange-traded fund (ETF)?

An ETF is essentially a unit trust fund, except that it is traded on a stock exchange. It represents a basket of securities and is designed to track the performance of an index. The performance of an ETF usually mirrors that of the index it tracks.

Take the FBM30etf as example. Since it tracks the FBM30, it will buy the index's constituent stocks. The number of shares bought for each stock will be based on its weightage on the index.

Q: What benefits does an ETF bring to investors?
Unlike unit trust funds, investors can buy and sell units of an ETF at anytime during trading hours like trading a stock. An ETF is traded in blocks of 100 units.

Instead of buying shares of each and every stock, ETF allows investors to gain exposure to a basket of securities with just a single purchase of ETF units. ETF offers portfolio diversification like unit trust funds.

ETF incurs low management fee as a result of passive management. Transaction cost is low (0.6% via brokerage) compared with unit trust fund (3% to 5% sales charge).

Q: How do I buy or sell ETF?

Like ordinary stocks, you can buy or sell ETF through your broker.

Q: How is the market price of an ETF determined?

As an ETF is traded like a stock, the price of each unit is determined by the supply and demand of the market, and in general, will be traded closely to the market value of the underlying basket of securities.

Q: How do I value an ETF?

An ETF is valued according to its net asset value (NAV). NAV is the fund's assets minus its liabilities divided by the number of outstanding shares. At the end of each trading day, the NAV will be calculated. The increase in NAV means the increase in the value of one's holdings.

Investors should also look at whether an ETF is traded at a premium or discount to the index it tracks.

Q: Does an ETF pay dividends?

Most ETFs do pay dividends. However, investors should study the prospectus of the particular ETF on its dividend policy.

Source: The Edge