ETF trading strategies in Malaysia

ETF stands for Exchange Traded Fund. The ETF market in Malaysia is still relatively new, with the first one being made available to investors in 2005. Since then, many more types of ETFs have since become available. However, there are only 18 ETFs trading on Bursa Malaysia as of January 2015, with most having an average daily transaction volume below 10 million shares per day.

An ETF can be considered a regular share listed on the stock exchange for those unfamiliar with stock trading strategies. You can buy and sell them like any other commodity throughout the day. You do not need to bother about whether it is traded or not now when your order was placed because it will be filled automatically.

However, unlike ordinary trading shares, where trading volume is usually at least a few million shares per day, the liquidity of ETFs falls behind. The market maker only makes quotes during AM and PM sessions under normal market conditions. In addition, there are no limits to how many units an investor can buy or sell in one transaction, unlike some other funds, which have a minimum holding of 100 ‘units’ before you can make transactions.

Therefore, it may be more difficult for investors with small amounts to trade ETFs because of the meagre daily average turnover rate of less than RM20 million per day and the lack of limit order executions.

Two popular ETFs in Malaysia

In Malaysia, there are currently two types of popular ETFs being traded in the market:

MSCI Malaysia ETF (KLIPS)
Nikko AM STI ETF (G3B).

KLIPS is only available for purchase by Malaysian individuals, while G3B can be bought either by local retail investors or institutional investors.

Purchasing units in KLIPS will allow you to gain exposure to 30 large companies, namely Axiata Group, Genting Berhad, IJM Corp., MISC Bhd, AirAsia Group, Bumitama Gunajaya Agro etc.

G3B, on the other hand, invests in 50 actively managed STI ETFs which are equally weighted.

The current yield for both of these funds is 3% and 5%, respectively, depending on the fluctuation of their share price. This yield is meagre compared to global average Yields of over 8%. If you compare them using the most common formula FV = PV * (1+r)^n, where r is rate/yield per period and n is the number of periods, G3B will be worth more than KLI due to its higher yield.

The best way to increase your chances of making successful trades is by understanding when to enter and exit a trade. The technical analysis makes the best of this situation by better understanding when to place your orders.

Here are some popular strategies used by retail traders:

The breakout strategy

It is buying ETFs once it breaks out from critical support and resistance levels with the help of trend lines, moving averages, Fibonacci retracement levels, open price gaps and swing highs/lows. These charts allow you to pre-emptively decide whether there will be higher chances of an ETF breaking out from its current level or not.

The Bollinger Band strategy

It places buy orders for entry points when its indicators go beyond two standard deviations away from its 20 day high low values. Once it returns to its range-bound channel, you can expect a reversal of a trend.

The price channel strategy

A bullish channel when the ETF trades within higher highs and higher lows is indicated by parallel upward sloping lines. When the ETF is trading within lower highs and lower lows, a bearish channel is indicated by parallel downward sloping lines.

These strategies are just some examples of how technical analysis can be used in your trades, but it doesn’t have to be complex at all. Many retail traders use simple moving averages to their advantage because they provide clear signals without any guesswork required from you. You can also take help from fundamental analysis such as news announcements from local financial about new products being launched to improve your chances for a successful trade.