Task force outlines measures to spur ETF market growth

KUALA LUMPUR: Securities Commission Malaysia (SC) is spearheading initiatives to spur Malaysian Exchange-Traded Funds (ETFs), which have seen slow growth despite being in the market for 12 years, first by removing principal advisers from the process of issuing an ETF.

ETFs are funds that track indices and typically invest in components of their respective benchmark indices. These funds are traded like stocks on exchanges and offer investors instant diversification by passively tracking indices at a lower cost than actively managed funds.

The domestic ETF market began with the first launch in 2005, growing to eight ETFs in 2015 with sporadic launches in between. Since then, it has remained stagnant with no new launches to date.

In comparison, there are 4,971 ETFs globally with over US$3.8 trillion (RM16.4 trillion) in assets under management (AUM), of which 872 ETFs are in Asia Pacific with AUM over US$133 billion as of April this year. Global ETFs are expected to reach US$7 trillion in AUM by 2021.

Yesterday, a task force led by the SC announced several measures to spur innovation and drive growth in the ETF market. The task force was formed last year, comprising Bursa Malaysia, fund managers, market makers and institutional investors.

Its first act is expected to attract more issuers and encourage issuance of ETFs by significantly reducing costs for issuers.

Subsequent measures it is recommending include lowering the minimum capital requirement for ETF issuers from RM10 million to RM2 million and reducing the time to market in the issuance process.

In terms of distribution channels, the task force recommends permitting financial institutions, online platforms and financial planners to offer ETFs to clients via stockbroking companies, which will provide greater access at a lower entry cost.

It is also looking at facilitating the introduction of new types of ETFs including futures-based and conventional commodity-based ETFs and is looking at allowing more flexibility in investment strategies including the introduction of Leveraged and Inverse ETFs.

For market makers, SC and Bursa Malaysia are providing rebates and waiving fees applicable to ETF market makers, including a 100% clearing fee rebate by both SC and Bursa Malaysia.

There would also be nationwide roadshows and investor education programmes to attract participation and ensure that investors are well-equipped in trading ETFs. SC said it will work with relevant stakeholders to implement these initiatives by year-end.

“For a start, it is a fair move to get more participation by players, to get more issuers to issue ETFs, which would mean more variety. However, the initiatives shouldn’t stop there. There is more to be done for the ecosystem,” i-VCAP Management Sdn Bhd CEO Mahdzir Othman told SunBiz.

“Maybe having more sexy stuff on board like Leveraged and Inverse ETFs would provide more variety. However, these can be quite risky so there must be investor education,” he added.

For i-VCAP, Mahdzir said, it has a few ETFs in the pipeline which he hopes will make the market more interesting. He said the launch of these new ETFs would depend on when they are approved and time to market.

Mahdzir opined that the ETF market has been growing slowly due to lack of depth, lack of awareness among investors, high cost to the issuers and lack of distribution channels, among others.

“Investors want more volatile movement but it is pretty limited for ETFs in Malaysia, it is not exciting enough. Although ETFs are listed, investors, especially retail investors, expect it to be more exciting but it depends on the fund’s respective benchmark index,” he said.

“The huge challenge (for issuers) is on the marketing side. They want investors to be ready to put money into it,” he said, adding that investors do not fully understand ETFs.