What the FBM KLCI etf has to offer

According to Strategic Insight, global net sales of mutual funds (excluding ETFs) were minus US$6 billion (RM21.42 billion), while net sales of ETFs were positive US$7.7 billion (RM27.49 billion) during the first three months of 2009*(1).

A recent study also revealed that trading volume increased by 85 per cent from year-end 2007 to year-end 2008, on all exchange products in Asia, ex-Japan(*2).

Although ETFs are experiencing a growth in popularity across the world, these instruments are still new to many investors in Malaysia. The first equity ETF(*3) launched in the country is the FBM30etf (now known as FTSE Bursa Malaysia KLCI etf).

We would like to share with you some of the investing benefits of the fund and how you can use it to capture investment potential in the Malaysian stock market.

* Buy Malaysia's top 30 stocks in one deal

FBM KLCI etf is designed to follow the performance of its benchmark index, FTSE Bursa Malaysia KLCI. "The Fund, as at end of last month, has given a year to date return of 22.61 per cent. The one year return is -7.37 per cent, in line with the index's performance of -6.62 (*3) per cent," said Datin Maznah Mahbob, chief executive officer, Funds Management Division of AmInvestment Group Bhd.

The index comprises the top 30 largest companies in the market. Hence, buying the fund will give investors the advantage of immediate exposure to the country's top 30 stocks which are representative of the Malaysian stock market.

Moreover, investors will also benefit from this cost-efficient tool as it is less costly than building a portfolio from multiple stock purchases.

* Cheaper way of investing

The cost of investing in the FBM KLCI etf is generally lower than an actively managed fund. This is because the fund is passively managed as compared to actively managed funds that involve frequent trading, thus generate higher transaction costs, which in the long run could diminish the fund's return.

For example, a unit trust fund may charge up to 1.5 per cent per annum on management fee(*3), which is much higher compared to the management fee of 0.50 per cent charged by FBM KLCI etf.

In addition, investors purchasing a unit trust fund may incur entry fees of up to 6 per cent, while the fund does not charge any entry fee. There is nominal brokerage and clearing fees.

* Transparency

With the fund, investors also have the advantage of easily accessing real-time information such as fund prices and fund information.

With the transparency that the fund offers, investors can regularly monitor and have an up-to-date valuation on their investment.

These help them to capitalise on market trends and also make informed trading decisions. "These endearing features are some of the main reasons why investors increasingly embrace ETFs as their choice of investment," noted Maznah.

* Liquidity

Since the FBM KLCI etf can be bought and sold throughout the trading day, it offers the same level of liquidity as any other stocks on the exchange.

Like any other ETF structure, the fund's liquidity is also enhanced by its unique creation and redemption process. Liquidity providers or participating dealers are appointed to provide liquidity for the creation of new units when demand is high or the redemption of units when demand slows.

The liquidity offered by the fund provides investors the flexibility to enter and exit the market easily and this enables them to capitalise on market opportunities.

* Solution for portfolio construction

Investors can also opt to use the fund as a core holding in investment strategies. They can leverage on the broad diversification and lower costs of the fund through the core holding and then add stocks, unit trust or other alternative investments to enhance their investment portfolio.

Maznah acknowledges that ETFs are most effective when used as tools for implementation of investment strategies.

She said, "Investors can take advantage of the ETF such as the FBM KLCI etf to construct portfolios that meet their respective investment requirements. When the fund is combined with other investment products, more sophisticated portfolios can be realised."

* Affordability

FBM KLCI etf is very affordable compare to stocks and unit trust. The minimum trading board lot size is 100 units. If the FTSE Bursa Malaysia KLCI is at 1,052.26, an investor who wants to buy the FBM KLCI etf only has to pay RM1.05 to buy the minimum lot, which means the investor has to only fork out RM105 to buy the ETF. The initial investment for unit trusts start from RM1,000.

Over the last six months, we have been reading news about Malaysia's new benchmark index FTSE Bursa Malaysia KLCI that represents the 30 largest companies, replacing the current KLCI, effective Monday. Following the change, the FBM30etf was renamed to FBM KLCI etf to reflect its new benchmark index FTSE Bursa Malaysia KLCI. (See illustration above).

For a seamless transition, the closing value of the KLCI on July 3 2009 was used as the opening value of FTSE Bursa Malaysia KLCI on July 6 2009. To enable a close relationship between the fund's price and FTSE Bursa Malaysia KLCI, a unit split exercise was implemented to lower the fund's price from its current level to an indicative price of 1/1000th of FTSE Bursa Malaysia KLCI value.

For instance, if the index value of FTSE Bursa Malaysia KLCI is at 1,100 points, the fund's market price would be about RM1.10. The new price after the unit split would enable investors to relate the fund's performance against the FTSE Bursa Malaysia KLCI's movement.

"The lower price will make the fund more affordable for retail investors," said Maznah. "With lower price and cheaper investment costs, the FBM KLCI etf offers retail investors an affordable and cost-efficient investment alternative," she highlighted.

Conclusion

There are many favourable characteristics the FBM KLCI etf has to offer such as its ability to provide exposure to the top 30 Malaysian stocks, its low costs, and its flexibility to trade on an open market with a small amount of capital.

The fund also offers transparency where investors can easily access real-time information on their investment.

Now that you have heard about the fund, the next time you want to trade in the equity market, consider adding FBM KLCI etf to your portfolio as it enables you to capture the Malaysian market performance in a single transaction.

Sources:

(*1) Barclays Global Investors, May 2009

(*2) Investment & Pensions Asia, Second Quarter 2009

(*3) Lipper Hindsight, June 30 2009

(*4) FBM KLCI etf (formerly known as FBM30etf)

We recommend that you read and understand the contents of the Prospectuses for ABF Malaysia Bond Index Fund dated July 13 2008 (expires on July 12 2009) and FBM30etf dated June 7 2009 together with its Supplementary Prospectus dated July 6 2009 that have been registered with the Securities Commission, who takes no responsibility to the contents before investing.

You may view the Prospectuses from the funds' websites at www.abfmy1.com.my for ABF Malaysia Bond Index Fund and www.fbmklcietf.com.my for FBM KLCI etf or visit us at our nearest representative office for a copy of the Prospectuses. Unit prices and income distribution, if any, may rise or fall.

Past performance of a fund is not indicative of future performance. Please consider the fees, charges and risks involved including, but not limited to, the risk that units may be delisted from Bursa Malaysia, market risk, tracking error and the risks relating to the Benchmark Index (for ABF Malaysia Bond Index Fund) and the risk that units may be delisted from Bursa Malaysia, risks relating to the Benchmark Index, Derivatives and Zero Strike Call Options (for FBM KLCI etf).

AmInvestment Services Bhd does not guarantee any returns on the investments.

FTSE

"FTSE(R)", "FT-SE(R)" and "Footsie(R)" are trademarks of the London Stock Exchange plc and The Financial Times Ltd and are used by FTSE International Ltd ("FTSE") under licence. "Bursa Malaysia" is a trade mark of Bursa Malaysia Bhd ("Bursa Malaysia").

The FTSE Bursa Malaysia KLCI is calculated by FTSE. All intellectual property rights in the index values and constituent list vests in FTSE and Bursa Malaysia. Neither FTSE nor Bursa Malaysia sponsor, endorse or promote this product and are not in any way connected to it and do not accept any liability. AmInvestment Services Bhd has obtained full licence from FTSE to use such intellectual property rights in the creation of this product.