Safer bet to invest in ETFs

By YEOW POOI LING

They can also be an asset allocation tool to certain exotic markets

KUALA LUMPUR: Exchange traded funds (ETFs) offer a safer bet for investors who want to spread their risks in the current uncertain environment, says i-VCAP Management Sdn Bhd chief executive officer and director Zainal Izlan Zainal Abidin.

“There will always be investors who are keen on investing in a stock directly. ETFs cater to those who prefer some diversification, cost savings and convenience of time,” he told StarBiz in an interview recently.

Izlan said global institutional fund managers used an ETF as an asset allocation tool to gain exposure in certain “exotic markets”.

In the fourth quarter of last year, portfolio flows into ETFs in the US and Europe was positive compared to mutual funds.

“Many investors sold their positions earlier and were holding cash. Market levels subsequently were low but volatility remained high. In order to minimise risk while taking a small position, they bought ETFs. By doing so, they’re utilising cash for a short-term tactical strategy,” he said.

i-VCAP is the fund manager of MyETF Dow Jones Islamic Market Malaysia Titans 25, the first syariah ETF in Asia and the largest syariah ETF in the world in terms of net asset value, which is slightly under US$150mil.

Investors, however, do need to be aware of the objectives of each ETF.

For example, an ETF that invested in global energy stocks would carry the industry’s risks, Izlan pointed out.

MyETF was listed a year ago on Bursa Malaysia and tracks closely the performance of the top 25 stocks on the Dow Jones Islamic Market Malaysia Index.

MyETF appealed to investors who want to follow syariah principles and “this doesn’t necessary mean only Muslims,” Izlan said.

There are investors who prefer funds with limited exposure to conventional financial institutions, or ethical industries that exclude gaming and tobacco, and syariah funds fit those descriptions.

“Last year, syariah funds around the world did better than conventional ones because of limited exposure in conventional banking stocks, which were significantly hit. Those who do not want that kind of exposure would find syariah funds attractive,” he noted.

On the performance of MyETF, Izlan said it had outperformed the benchmark index slightly.

“The objective of the fund is to track the performance of the benchmark index so in this sense, we are managing it quite closely,” he added. Understanding of ETFs among Malaysian investors, however, is still low.

“Many are still unfamiliar with ETFs in comparison to unit trusts but we’re not too disheartened by investors’ (low) awareness. In France, it took about four to five years before trading in ETFs picked up,” Izlan said.

Given the speed of information flow currently, the awareness level in Malaysia should improve significantly in the next one to two years, he reckoned.

Besides its use as a diversification tool, ETFs also offer intra-day trading opportunities for investors.

“If the price of (an) ETF is trading efficiently, investors can take advantage of the intraday volatility. This benefit is not available for unit trusts,” Izlan said.

ETFs also provide greater transparency compared to unit trusts as investors can view the complete list of stocks in the ETF on Bursa Malaysia and the fund’s website on a daily basis.

“Investors know what they’re getting themselves into while for unit trust, you only see a snapshot of the position during the semi-annual reports,” he added.

The transaction cost of ETFs is also cheaper than that of unit trusts.

The combination of brokerage fees, stamp duty and clearing fees amounted to less than 1%.

The front-end sales charge for unit trust is between 4% and 6%.

“Over a horizon of three years, which is a reasonable holding period for a fund, the savings (from ETFs versus unit trusts) can be quite substantial,” Izlan pointed out.

i-VCAP intends to launch three to four new funds this year, including a second tranche of MyETF, with a focus on Shariah compliant securities.

Izlan noted that there were “pockets of opportunities” in the equities market.

“Prices are down by 40% to 60%, back to levels in 2006. For those who can do dollar averaging, now could be a good time to accumulate,” he said, adding that the global economic landscape was anticipated to recover in 2010 given the concerted pump-priming efforts by governments and central banks around the world.

Thestar