Published in Asia Asset Management May 2007
Growth in exchange traded funds (ETFs) worldwide has been phenomenal and both the stock exchanges in Malaysia and Singapore, Bursa Malaysia and Singapore Exchange Limited (SGX), are working towards rolling out several new ETFs each by this year-end.
When Malaysia’s first and so far only ETF, the ABF Malaysian Bond Index Fund, was listed on Bursa Malaysia in July 2005, there were 350 ETFs on bourses globally with a total of about US$313 billion in assets.
According to Morgan Stanley, at the end of the third quarter last year, there were 669 global ETFs with assets of US$505 billion. In addition, the global financial services firm has predicted that ETF assets under management will exceed US$2 trillion in another four years.
In the first six months of last year, 136 exchange traded funds (ETFs) were launched worldwide compared with 119 for the whole of the year before.
“ETFs, by and large, are becoming a force to be reckoned with worldwide,” remarked Chen Ee Fang, Singapore-based Greater China representative at Vanguard Investments, a leader in the establishment of low-cost index funds that now also include a range of ETFs.
“We strongly support the development of ETFs as a product as it makes an impact in improving free float, enhancing liquidity and opening access to retail and institutional funds both locally and abroad,” stated Omar Merican, chief operating officer at Bursa Malaysia Berhad.
“As you know, free float and liquidity criteria are key components of international ratings for a given market,” he pointed out. “We look to position our exchange as a hub that offers quality ETFs that can attract global investments and eventually position us as an international investment centre.”
Equity ETF Based on FBM30
Bursa Malaysia will be launching an equity ETF based on the FTSE Bursa Malaysia Large 30 Index (FBM30), a new free float-adjusted market capitalisation index which will comprise the 30 largest listed companies by market capitalisation, later this year.
“Investors, especially retail investors, will benefit from this as it will give them access to stocks that may previously have been out of their reach,” observed Mr Merican.
AmMerchant Bank Bhd last August received the nod from Malaysia’s Securities Commission to establish and list the FBM30 ETF, expected to be the catalyst in building greater liquidity and depth in the markets, on Bursa’s main board.
The manager of the FBM30 ETF will be AmInvestment Services Bhd, the unit trust management company of AmMerchant Bank, which currently manages 25 funds with a total fund size of RM5.4 billion.
Earlier this year at an investors conference, the country’s Prime Minister, Abdullah Ahmad Badawi, called for the listing on Bursa Malaysia of ETFs collectively having an initial fund size of RM3.5 billion by year end.
This was to increase liquidity in the market, Mr Abdullah said, adding that Government Linked Investment Companies (GLICs) will participate in the ETFs by selling a portion of their portfolios in exchange for units in the ETFs.
“We are very encouraged by the Prime Minister’s announcement. Poor free float and liquidity have been a long-standing opinion made by investors on the capital market and we believe that ETFs are a constructive option to improve the free float issue,” said Mr Merican. “RM3.5 billion will certainly help to take ETFs to ‘critical mass’ quickly.
“The investment landscape in Malaysia is evolving and the timing is now right to introduce more ETFs to the market,” he said. Besides the equity ETF, Bursa will also launch a Shariah-compliant ETF in the coming months.
“We are already working with the industry to explore additional ETF variants that may appeal to our market,” Mr Merican added. Among these are sectoral and commodity ETFs, which are expected to provide a wide array of investments to investors who are looking for diversification.
Meanwhile, according to Magdalyn Liew, assistant vice-president at SGX, the Singapore bourse has another two to three ETFs in the pipeline, which are likely to be Asian based, including a Shariah-compliant ETF.
Last February SGX, together with FTSE, launched the FTSE SGX Asia Shariah 100 index, which represents the performance of Shariah-compliant companies from Japan, Singapore, Taiwan, Korea and Hong Kong.
“We are continually looking to enhance our product suite. SGX is open to considering the merits of working with like-minded issuers to list products that meet the needs and appetite of global investors,” said Ms Liew.
ETFs appeal to both retail and institutional investors, the exchange said. “They provide an efficient, transparent and flexible means for the man-on-the-street to access the various underlying markets tracked by the respective ETFs,” explained Ms Liew.
“Institutional investors will find ETFs useful, for example, to gain efficient access to the market for the purpose of tactical rotation, targeted exposure or simply strategic portfolio diversification,” she added.
There are already 11 ETFs listed on the SGX, including Asia’s first gold based ETF, the streetTRACKS Gold Shares, and the iShares MSCI India ETF, which is the world’s first ETF outside of India to offer investors access to the Indian equities market. Both these were listed on the SGX last year.
Busy Year for ETFs in Singapore
Last year was a busy one for ETFs on the Singapore bourse. Starting with the September 2006 listing of the FTSE/Asean 40 ETF, which creates a liquid tradable Asean asset class, five other ETFs were launched.
And this year promises to be no different; already three ETFs have been listed: the Lyxor ETF Commodities CRB in January, the Lyxor ETF Hong Kong (HSI) and the Lyxor ETF MSCI Taiwan, both in March.
In addition, SGX has five cross-linked ETFs with the American Stock Exchange (AMEX) which began trading in 2001, including the popular S&P 500 SPDRS also called Spiders, and the Diamond Trust Series 1 also known as Diamonds.
When the first ETFs started trading on the Singapore exchange in 2001 it was amid lukewarm response from both retail and institutional investors. As the economy picked up, so too has trading interest in ETFs.
Over in Kuala Lumpur, it was the other way around. When the ABF Malaysian Bond Fund was launched in July 2005, the response was strong and it got good support from investors and regulators.
However, its performance since last year has been lacklustre owing to a downward trend in bond prices. According to Bursa Malaysia, this uneventful showing could also be attributed to a lack of interest from investors due to insufficient knowledge of the bond market.
Both Bursa and SGX are committed to educating the industry and members of the public about ETFs, a critical part of promoting the fledgling ETF markets in the two countries. “The success of launching an ETF lies not only in ensuring that there is adequate infrastructure and regulatory support, but also investor buy-in towards the ETFs,” commented Mr Merican.
Bursa has planned for marketing activities that include conferences and road shows for the private sector, briefings to stakeholders as well as marketing and educational communications to the investor community.
SGX, too, conducts regular educational seminars, product seminars and courses and works closely with issuers to educate its retail market participants on ETFs. It also collaborates with its brokers to reach out to their clients.
“In order to promote a vibrant ETF marketplace, we need to create awareness and interest of the product class and its key benefits amongst investors, existing or new, institutional or retail,” said Ms Liew.
ETFs are shaping up to be an important component of both the stock exchanges of Malaysia and Singapore, boosting liquidity and contributing towards overall trading volume and value and increasing velocity.