Time to redraw the ETF landscape

KUALA LUMPUR: The development of the exchange-traded fund (ETF) market in Malaysia, which has been rather sluggish, could be given a boost with improvements in the infrastructure with the help of the industry regulators, said i-VCAP Management Sdn Bhd CEO Mahdzir Othman.
"Bursa Malaysia and the Securities Commission (SC) will definitely have to help out in terms of encouraging more issuers, encouraging more people to put up ETFs so you can take into account the commercial impact for the issuer," he told SunBiz in an interview recently.
According to him, ETFs are costly for new issuers due to various fees including legal fees and advisory fees, which is not encouraging for new issuers. In addition, new issuers can only put in their own submissions after five years of managing an ETF.
"You cannot make it too costly for the issuer to come up with the fund when in the end, it's not really something commercially viable. I think some of the issuers are not seeing the volume for them to actually get into the market. From a commercial standpoint, you have to make it more viable for the new issuers to come in," he added.
Besides the role of regulators, Mahdzir said investor education and awareness as well as the ecosystem of ETFs can be improved to further develop the ETF market.
He said Malaysia is lagging in terms of ETF development compared with its regional neighbours such as Thailand, whose ETF market only started about five years ago, already offering 20 ETFs.
In comparison, Malaysia only recently introduced its seventh ETF this month despite listing its first ETF in 2005. There are only three issuers in Malaysia namely i-VCAP, CIMB and AmInvestment.
Globally, the ETF is a popular investment product among investors with some countries offering 50 to 100 ETFs.
"In terms of the understanding (of ETFs in Malaysia), to a certain extent yes, there are more people aware of it but it has not yet translated to actual investments. The take-up rate is still slow.
"We do get more feedback and enquiries from investors but again, that has not translated to actual investment to the ETF, not only on our end but also the other ETFs in the market. A lot more needs to be done because the whole ecosystem needs to be enhanced further," said Mahdzir.
The ecosystem of the ETF investment involves regulators, market makers, institutional investors as seeder for the fund and further enhancement to the ecosystem would provide a more conducive environment for the parties to carry their role and further develop the ETF market.
"Market makers may need some incentives for playing their role, regulators maybe make it a bit more conducive for issuers in terms of cost and also time to market any issuance of the product. In terms of investor education about the product, obviously it prominently needs to be addressed," he said.
Mahdzir said i-VCAP has been trying to encourage remisiers and brokers to be more involved in promoting ETFs, as ETFs do not have distribution channels, unlike other funds like unit trusts that have agents to promote and sell.
However, despite the benefit of commissions, remisiers and brokers are reluctant to push the product as they feel it is not as exciting as the stock market.
"The brokerage rate that they get may not be exciting but at least it's something for them. The more people trade, the more commission they get. In this case, don't get your client to put their trading portion into this kind of product because this is not a trading product. It is a saving product so you've got to change the mindset," he said.
"If the market has more depth and variety, there will be more excitement because they can use different underlying to put into their portfolio, their asset allocation. Ideally that's the case but for us to actually reach that stage, it depends on how we build the infrastructure and ecosystem, and also awareness," he added.
i-VCAP, a wholly-owned subsidiary of ValueCAP Sdn Bhd, is a manager of Islamic ETFs in Malaysia. It manages two ETFs namely MyETF-DJIM25 and MyETF-MMID. It has also launched the prospectus for its third ETF, the MyETF MSCI SEA Islamic Dividend (MyETF-MSEAD).
Scheduled for listing on May 7, MyETF-MSEAD is an open-ended fund with approved size of 500 million units and the subscription period is up till Wednesday, April 22 at RM1 per unit with minimum subscription size of 100 units.
The total ETF market is currently valued over RM1 billion in Malaysia. Besides MyETF-DJIM25 and MyETF-MMID, the other four ETFs listed on Bursa Securities are ABF Malaysia Bond Index Fund, FTSE Bursa Malaysia KLCI, CIMB FTSE China 25 and CIMB FTSE ASEAN 40.