Investors in the Malaysia stock market might be missing out on a great advice from Warren Buffett. The oracle of Omaha has openly announced how he will be managing his money from his grave when the time comes. For the liquid asset that Buffett is not giving away to charities, the instruction of his will is to put 10% of it into short-term government bonds while the 90% into a very low-cost S&P500 index fund.
There, it seems to be the advice of a lifetime. For those investors who are not planning to actively invest in the stock market, Buffett suggests that maybe a low cost market index fund is the best way to go. Most index fund can easily be accessible through many Exchange Traded Funds or better known as ETF.
All this is all good and well, except that investors in Malaysia might not really have the luxury of finding such a ETF.
In fact, there is only 6 ETF listed in the Malaysia Stock Exchange, they are:
1. MYETF MSCI Malaysia Islamic Dividend
2. MYETF Dow Jones Islamic Market Malaysia Titans 25
3. FTSE Bursa Malaysia KLCI ETF
4. CIMB FTSE China 50
5. CIMB FTSE ASEAN 40 Malaysia
6. ABF Malaysia Bond Index Fund
Of the 6 ETF, only the FTSE Bursa Malaysia KLCI ETF is a index fund that tracks the Malaysia composite index. The other two MYETF index fund are based off more minor indexes which are prone to constant revision of adding and removing index constitutions which might affect the long term return of the index.
Thus, we will try to focus mainly on the FTSE Bursa Malaysia KLCI ETF and here is why there are some still some risks with the instrument even though it seems to fit Buffett’s suggestion of being a low-cost market index fund.
At the end of FY2014, the ETF only has a net asset value of RM3.0 million, which is a very small fund size by any measure. This leads to very low volume of trades going on for this ETF. At some days, there is not even 1 trade done for the ETF. This means that there is a real liquidity risk associated with this ETF. If you are going to use it as vehicle to store your retirement fund, there is a real risk that the fund might not survive for so long given the small fund size and you might not be able to cash out without significantly discounting your stake due to the low liquidity when the time comes.
Another issue with the fund is also related to its small fund size, which leads to the fund having an expense ratio of more than 1% of asset under management (AUM). It actually claimed an expense ratio of 1.04%, 1.21% and 1.07% respectively in 2014, 2013 and 2012. The issue here is, that is not exactly “low-cost”. In comparison to Vanguard S&P500 ETF, the ETF that Buffett is going to invest in, Vanguard has an expense ratio of just 0.05% of asset under management. That seems like a whole world of difference.
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So there you have it. Even when Warren Buffett advise all of us to invest in a low-cost index fund, we have to know that not all ETF are created equal. We still have to do our homework on understanding the structure and details of the funds we are investing in.
As a rule of thumb, it is much better to invest in an ETF with a sizable AUM and a strong trading volume. Most importantly, make sure the index fund is indeed “low-cost”.
It seems for now, Malaysia Investors do not have that choice.
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The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Stanley Lim’s personal capacity and do not in any way represent those of his employer and other related entities. Stanley Lim does not own any companies mentioned.
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