Low demand for ETFs due to lack of awareness, limited choices

by NG MIN SHEN/ graphic by MZUKRI

DEMAND for exchange-traded funds (ETFs) in Malaysia remains low as there is a general lack of awareness on the virtues of ETFs, coupled with limited choices for potential investors.

ETFs are open-ended index tracking funds that are listed and traded on a stock exchange. An ETF may track an index, commodity or basket of shares like an open-end investment fund, but trades on an exchange like a stock.

This allows ETFs to provide broad diversification, while averting the risks that come with owning the stock of a single company, as per Bursa Malaysia’s website.

Despite the advantages of ETFs, the funds are not as popular as other investment options yet, according to Affin Hwang Asset Management Bhd (Affin Hwang AM).

“In terms of demand, we believe interest may have been lacklustre due to the inability of investors to build a more comprehensive portfolio, given the limited choices of ETFs,” Affin Hwang AM director of innovation lab and alternative investment Chong Lee Choo told The Malaysian Reserve (TMR).

Many are also not aware of the existence of ETFs or how these funds work, she added.

“But with an increased number of marketing activities and more educational seminars, we do see a rise in interest in the product — evident in the growing trading volumes.”

Retail investors in particular stand to gain from investing in ETFs as the funds provide efficient exposure, while allowing investors to capitalise on the expertise of strategies placed into the index construction.

“An ETF is able to serve as a platform for investors to gain diversified exposure into the market at just a fraction of the price,” Chong said.

There are currently 19 ETFs listed on the Main Market of Bursa Malaysia, comprising one commodity tracker, six equity funds, five Shariah-compliant equity ETFs, one fixed income fund and six leveraged and inverse (L&I) ETFs.

The ETFs are provided by five managers, namely Affin Hwang AM, AmFunds Management Bhd, Principal Asset Management Bhd, i-VCAP Management Sdn Bhd and Kenanga Investors Bhd.

The list is still comparatively small compared to more developed markets, Chong noted, adding that there’s still “much room for improvement”.

“There are still many within the investment community who are unfamiliar with the concept of ETFs and often make comparisons against individual stocks. We do believe having more accessible information would be helpful.”

The additional requirements for trading selected ETFs may also be a deterrent. For example, a cash-upfront account is required to trade Affin Hwang AM’s Tradeplus Shariah Gold Tracker, while an investor declaration is required prior to trading the L&I ETFs.

“We believe convenience is something many look out for when making trades,” Chong said. “Thus, it is essential that all industry players work together to create a more conducive financial ecosystem.”

Low trading volumes are another concern as many investors fear this could potentially result in having their investments stuck in the market.

These investors are likely unaware that ETFs have appointed liquidity providers to constantly be present in the market to provide prices and meet the trading demand, Chong explained.

“We believe there is sufficient liquidity in the market, just that it’s not been flowing into ETFs.”

More engagement programmes are needed to educate the public on how the instrument works, as well as its advantages.

Liquidity is rarely an issue for these funds as the ETFs generally buy into liquid assets as their underlying, making each ETF’s liquidity as deep as the liquidity of its underlying.

“The manager could also easily increase/reduce units in circulation by buying or selling down more of the underlying exposure,” Chong added.

Though Malaysia’s ETF market remains small, demand should pick up as more funds are rolled out, hopefully piquing investor interest.

Bursa Malaysia told TMR recently it expects more ETFs to be listed locally as the instrument attracts more participants from institutional to retail investors moving forward.

The exchange also plans to introduce more innovative products including sectorial indices-linked ETFs, its CEO Datuk Muhamad Umar Swift said at a media briefing last month.

In the 13 years from the first ETF launch in 2005 up to 2018, there were just 10 ETF listings in Malaysia.

However, the number nearly doubled with nine new ETFs coming on board since last year, which also resulted in the doubling of trading activities for the period, Bursa Malaysia said.

As of end-June 2020, the three best performers on the exchange are the TradePlus Shariah Gold Tracker with a 29% year-on-year (YoY) return, the TradePlus S&P New China Tracker with 24% YoY and the MyETF MSCI Malaysia Islamic Dividend with 17% YoY.

Five ETFs were listed in 2019, of which four debuted in November under Affin Hwang AM. In January this year, Kenanga Investors listed two L&I funds.

Affin Hwang AM then launched two equity ETFs in July 2020, bringing its total ETFs under management to eight.

“We have a couple more ETFs in the pipeline, which we plan to launch either later in the year, or early next year,” Chong said.

The company saw RM16.2 million in turnover for its ETFs in the second-quarter of 2020, with TradePlus ETFs making up more than 60% of the total turnover.