Exchange-traded funds

Module 7's Section 3 includes ETFs: how they are structured and created, how they trade on Bursa Malaysia compared with unit trusts, NAV, premiums and discounts, tracking, replication methods, and the leveraged, inverse, commodity and Islamic ETFs allowed under the SC's revised ETF Guidelines (in operation from 2 January 2019).

3 min read3 sections

Checked against SIDC Module 7 Study Outline (Jul–Dec 2026) Topic 7; SC media release on the revised ETF Guidelines (sc.com.my); ETF Stream and Affin Hwang AM releases on Malaysia's first leveraged and inverse ETFs (2019). As at October 2026. Independent prep, not endorsed by SIDC or the SC.

Must-know for the exam

An ETF is a fund whose units trade on an exchange like shares, through a stockbroker, held in a CDS account.
Participating dealers create and redeem units in large blocks (creation units) in exchange for the underlying basket or cash.
NAV per unit = (assets − liabilities) ÷ units in issue.
Premium or discount = market price ÷ NAV − 1; creation/redemption arbitrage keeps it small.
Tracking difference = fund return − index return (mainly fees); tracking error = volatility of that gap.
Replication: full physical, sampling, or synthetic (swap-based, adding counterparty risk).
The SC's revised ETF Guidelines (from 2 January 2019) allowed leveraged and inverse, synthetic, commodity and smart beta ETFs.
Leveraged and inverse ETFs reset daily, so multi-day returns depend on the path; retail investors must pre-qualify.
Market makers quote bid and offer prices to keep units liquid.
Unit trusts deal with the manager at once-a-day NAV-based prices; ETFs trade all day.

On this page · 3 sections

Traps that cost marks

Confusing an ETF with a unit trust because both are funds.
Thinking retail investors create ETF units directly with the manager.
Forgetting to deduct liabilities.
Overlooking the creation/redemption arbitrage that keeps ETF prices near NAV.
Treating ETFs as unit trusts with a listing badge.
Thinking a passive ETF can outperform its own index.
Getting the sign of the tracking difference wrong.
Using tracking error and tracking difference interchangeably.

Structure and trading

An ETF is a collective investment scheme listed on the exchange. Participating dealers create units by delivering the basket (or cash) and redeem them for it; market makers quote prices; a trustee holds the assets; the manager runs the fund to its objective. Investors buy and sell units through a stockbroker, paying brokerage, and hold them in their CDS account.

Example: assets RM105.2m, liabilities RM0.2m, 50m units: NAV RM2.10; a price of RM2.14 is a 1.9% premium, which dealers close by creating and selling units.

Trap: thinking retail investors create units with the manager, or that anyone guarantees the price.

Takeaway: dealers create, investors trade, arbitrage anchors the price to NAV.

Tracking and replication

Term	Meaning
Tracking difference	Fund return minus index return (7.2% − 7.8% = −0.6 points)
Tracking error	Standard deviation of the return gap
Full replication	Holds every index constituent at index weight
Sampling	Holds a representative subset
Synthetic	Gets the index return from a swap; counterparty risk

Trap: using tracking error and tracking difference interchangeably.

Premium

Every note. Every question. One pass.

1 more section of this note is part of Premium.

Every section of every study note
Every question in every live SIDC module
Full timed mock exams
A worked explanation on every question
Your full mistake bank and weak-area review

Unlock with Premium

From ≈RM16.58/mo on the Until-you-pass pass (12 months)