THE ABF MALAYSIA BOND INDEX FUND (ABFMY1) was the first Malaysian exchange-traded fund (ETF) to be listed on Bursa Malaysia on July 18, 2005 with a total of 537.4 million units at a net asset value (NAV) price of RM1.0434, giving it a total market capitalisation of RM560.7mil.
The ABFMY1 also made history as it was the first bond ETF to be listed on the market, well before any equity-based ETF. It took almost two years before the next ETF was listed - the FBM KLCI ETF with a market capitalisation of RM81.1mil in July 2007. To date, Malaysia has some 10 listed ETFs (inclusive of a Gold ETF and eight other equity index-based ETFs) with a combined market capitalisation of about RM2.04bil.
Out of this amount, RM1.47bil in market capitalisation is related to ABFMY1 while another RM41.3mil is the Gold ETF, which are both not equity-based ETFs.
With a market capitalisation of about RM2bil, the ETFs listed on Bursa Malaysia only represent 0.11% of the overall market capitalisation of about RM1.751 trillion. Clearly, ETFs have not gained the traction that many had hoped for since they were first introduced in 2005.
Analysing the size of the individual ETFs, five of them have shrunk, with the total number of units in circulation declining by between 10% and 97%, while five others have seen growth in the number of units in circulation of between 3% and 345%. In terms of size, since the inception of the respective ETFs, the total market capitalisation has only increased by 27%, ie, from RM1.6bil to RM2.04bil.
Basically, an ETF is just like a stock that either tracks an index, a commodity, bonds or a basket of stocks. ETFs do change in price as they are traded in the market, but the underlying asset class typically provides the value they stand for.
The advantage of an ETF investment is its ability to mirror an index or its underlying asset at a lower cost. It is also cheaper to invest than unit trusts due to lower management fees.
According to EY Global ETF Research 2017, as at the end of September last year, the global asset under management (AUM) was about US$4.4 trillion and has grown at a pace of about 21% compounded annual growth rate (CAGR) since 2005.
The report also stated that its survey respondents predict ETF to grow at 15% per annum over the next three to five years and could reach US$7.6 trillion by 2020.
Indeed, the ETF market continues to grow and based on ETFGI, a leading independent research and consultancy firm, assets invested in ETFs and exchange-traded products (ETPs) listed globally broke through the US$5 trillion milestone at the end of May 2018 to reach US$5.004 trillion.
For global investors who want to have exposure to the Malaysian market, the most obvious choice is the iShares MSCI Malaysia ETF, which presently has a market capitalisation of about US$416mil (RM1.66bil). It is a relatively active ETF, as about 7% of total units outstanding trade daily.
How is Malaysia positioning to capture the growth of this ETF phenomenon is left to be seen, as clearly, ETFs in Malaysia are not well received by both the investing public and institutional investors.
Even the benchmark FBM KLCI, which has a wide following among both local and foreign institutions, sees very little traction coming from the ETF product of the index. It has only 1.672 million units in circulation and a market capitalisation of less than RM3mil.
The question is why? It is widely understood that Bursa Malaysia together with participating organisations have carried out numerous road shows to educate the public, and to a large extent, individual or retail investors do understand the product in general as it is popular in markets like South Korea. However, the liquidity of some of these ETFs has left many investors scratching their heads as they are rather difficult to trade, given the level of interest seen among the ETFs.
The equity-based ETFs too are rather illiquid despite the recent claim by i-VCAP Management that some of its ETFs saw trading volume rise significantly for the first four months of this year compared with a year ago.
Hence, there is an urgent need for greater participation among investors, especially among institutional investors, as looking at the size of some of the listed ETFs, institutional investors are largely absent.
Perhaps, the Securities Commission can play a greater role in approving the mandate given to unit trust products where a certain portion of the asset allocation, say 10% to 20%, will be allowed to invest in ETFs.
This would give fund managers greater flexibility, as its beta performance can be gained by its ETF exposure while the alpha is derived from the fund managers’ ability to pick market winners.
Asset management companies too should treat ETFs as if they are stocks under its approved investment mandate, as clearly, although the ETFs do act like another collective investment schemes or unit trusts, they in actual fact mirror the underlying assets.
With an AUM of more than RM770bil, the Malaysian fund management industry can benefit greatly with an ETF market which is more vibrant and active. As for the market makers, it is also time to be more creative with more sophisticated ETFs, which among others include Inverse ETFs as well as Leverage ETFs, other than the traditional benchmark indices.
By the way, we should encourage greater ETF products which are tied to market themes like Finance ETFs, Property ETFs, REITs ETFs, Oil & Gas ETFs, etc. This would provide investors an easier choice to trade, given a particular market theme.
Pankaj C. Kumar was formerly a director of investment and corporate strategy, chief investment officer and head of research.