Eyeing ETF - Removing the heartache of punting

My Musings : Corporate finance and the stock market

Eyeing ETF - Removing the heartache of punting

Muhamad Yazdi

Publish date: Fri, 27 Jun 2014, 03:41 PM

Last Saturday we ran a workshop on Exchange-Traded Funds (ETF) and amongst other things, we discussed about one of the benefits of ETF: the ability to take a 'big-picture' position efficiently, with a much smaller capital.

Take for example the news today (7/10/2013) as reported by the STAR:

Public Bank underpins KLCI advance

by joseph chin

KUALA LUMPUR: Public Bank led the FBM KLCI higher in early Monday trade, linked to talk that Chinese banks could acquire stakes in Malaysian banks.
At 9.05am, Public Bank was up 16 sen to RM18.06. Turnover was 1,900 shares done. Last Friday, it rose to an all-time high of RM18.10.
The FBM KLCI rose 1.64 points to 1,778.20. Turnover was 61.21 million shares done valued at RM25.73mil. There were 137 gainers, 40 losers and 108 counters unchanged.
However, BIMB Securities Research said it was cautious on the outlook for Malaysian equities despite the recent return of foreign funds into the region of late.
“Foreign funds into the local bourse had seen a net inflow amounting to RM329mil from the last five trading days. We doubt this would continue and remain adamant that some weakness will creep into the index with 1,770 as the immediate support,” said the research house.
Lower liners were among the major gainers. Triplc was the top gainer, rising 19 sen to RM1.58 while BoilerMech added 11 sen to RM1.90 and CCB seven to RM2.49.
CSL was the most active with 6.59 million shares done, adding 0.5 sen to 23 sen. GHL Systems gained 4.5 sen to 52 sen.
BIMB was the top loser, down 10 sen to RM4.63 with 100 shares done, Genting Malaysia shed three sen to RM4.30 and Genting Bhd two sen to RM10.42. KLCC shed three sen to RM6.35.

Without the ETF, in order for an investor to ride the rise of the KLCI, he would have to be right in his stock selection. He would need to have selected Public Bank into his stock portfolio for this occasion.

Well, that is definitely possible. Normally when people wants to take a position in the KLCI index/market, they would invest in some stocks which represent the bulk of the KLCI index. And that would include major banking stocks like Public Bank.

Therefore, if the rise in the index was caused by Public Bank like today, the investor would have been able to ride on the performance of the index.

However, what if the index was driven up by another bank instead, like CIMB or Maybank which also belongs to the index's constituents? Or if the indices were driven up by another sector altogether, like construction or telecommunications? In this instance, investors holding Public Bank shares would not benefit much, despite the KLCI making an upward movement.

An ETF, one which contains the constituents of the index itself, would mitigate this risk of missing the punt. Since the ETF has all the constituents of the index, it should move in tandem with the index, regardless of which stock is responsible for pushing it up. Therefore, the investors would not have the heartache of seeing the index move up while his portfolio remains stagnant.

Disclaimer: This is for educational purpose only and does not encourage you to invest, let alone making a recommendation for investment. If you do invest, make sure you read and understand all the information about your investment and risks involved. This disclaimer is not about avoiding getting sued, I mean it people, go read or get professional advice before you invest in anything.

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