ETF – fishing in deeper waters

EXCHANGE-traded funds (ETFs) – investment funds that are also traded on exchanges – have long been popular in developed markets, but have faced challenges in gaining traction in Malaysia.

Nonetheless, as the market evolves, growth-focused investors may find promising opportunities in this segment.

There are now 17 ETFs listed on Bursa Malaysia. Of these, 13 are equity ETFs, six of which are syariah-compliant. Of the others, one is a commodity ETF, one a fixed-income ETF, and two are leveraged and inverse ETFs.

Tradeview Capital Sdn Bhd chief executive officer Ng Zhu Hann tells Starbiz 7 there are benefits to investing in ETFs.

“It is a good investment asset class for passive investing. The fees are low, bringing down investment costs, and it often has an underlying asset to cater to investors.

“For those who are too busy to study or research the stock market before investing, or have no time to monitor their stock market portfolio due to their daily work schedule, an ETF is a good place to put some excess funds into the stock market without being directly exposed,” Ng says.

He adds that this form of investment offers some level of risk diversification, as ETFs usually consist of a basket of stocks rather than a single stock.

“In the event you invest in a single stock that you do not know enough about, and the price falls and it collapses, your capital is wiped out. If it’s just part of an ETF, it only brings down the price of the ETF by a small percentage,” he explains.

However, he acknowledges that it is difficult to compare the ETF market here and elsewhere, as each country’s stock market develops at a different pace.

“While we see ETFs being particularly successful in developed markets like the United States and Asian cities like Taiwan, the same successes is not easily replicated in the South-East Asian region.

“Every country’s economic characteristics are different, which in turn affects the local investors’ investment preferences, risk tolerance, and investment horizons. Even the level of financial literacy and financial means (disposable income) for investments differ,” he explains.

Although Malaysia is a few steps behind other markets, Ng notes that ETF products are being rolled out by investment banks, providing local investors with a variety of options.

“Malaysia has a Gold ETF that did very well in the past 12 months in tandem with the gold price rally. Also, China’s ETF rebounded strongly in tandem with the China-Hong Kong market uptick in September.

Then, we have the KLCI Leverage and Inverse ETF, which provides opportunities for retail investors who want to participate in the FBM KLCI index movement and invest in the ETF, whether to long or hedge their investment,” Ng explains.

He says the ETF segment has a high chance of growing in the coming years as investors become more sophisticated and gain a better understanding of the product.

“There are growth opportunities for ETFs in this part of the world because, with the improvement in the financial literacy of society as a whole, investors will see the value proposition of ETFs, especially those who want low-fee products and prefer not to waste time on individual stock picking.

“They can opt for passive investing in a basket of stocks,” he says.

Asked why there was a reluctance to invest in ETFs, Ng points to the lack of understanding of the product and how it works.

Some retail investors, he says, are not aware of what they are buying into, specifically the underlying asset of the ETF, which then makes them uninterested.

“Many retail investors in Malaysia find some joy in conducting their own individual stock picking, going as far as taking risks with penny stocks that lack fundamentals.

“The high-risk, high-return nature, coupled with volatility, fuels the adrenaline for active investing. They prefer that to passive investing,” he states.

Interestingly, for inverse and leveraged ETFs, authorities have imposed the requirement that such products are only allowed for sophisticated investors.

Ng points out that this is yet another deterrent for those considering ETFs.

“If retail investors are allowed to buy structured calls and put warrants without needing to be confirmed as sophisticated investors, this requirement for inverse and leveraged ETFs could be removed entirely,” he suggests.

Ng adds that Bursa Malaysia and brokerages have been promoting ETFs via roadshows, exhibitions and social media.

“I have heard that our exchange is engaging research houses to issue sell-side reports on ETFs to raise awareness of these products for investors. But it will take time, as it requires a generational change in mindset, investment behaviour and habits,” he says.

Meanwhile, Areca Capital Sdn Bhd chief executive officer Danny Wong tells Starbiz 7 the main concern with ETFs on Bursa Malaysia is their liquidity, as there is not much active trading on the stock exchange when it comes to ETFs.

“If there are fewer bids or offers, investors may perceive it as not being actively traded, which equates to lower liquidity,” Wong explains.

He argues that more market participation is needed, especially from market makers.

“The brokers and introducing brokers can work together with Bursa on this to create a more vibrant ETF market,” he notes.