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

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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