Passage Thru India Penang

Malaysia’s first equity exchange traded fund (ETF), FBM30etf is slated for launch in early July 07. According to a Star report on June 7 2007, the ETF is similar in nature to an unit trust fund in that it comprises investments in a basket of stocks. However, the difference is that the fund will be listed on the KLCI, and its price will fluctuate according to fluctuations in the underlying basket of stocks. In comparison, traditional unit trust funds are not listed. 

Key features of the FBM30etf (which unfortunately spells more like abbreviated profanity than a fund name L) are summarized as follows: 

– invests in Bursa Malaysia’s top 30 listed companies by market capitalization  

– counters must be Syariah-compliant eg. no banks or gaming stocks – approved fund size of 500 million units  

– management is by AmInvestment Bank  

open-ended fund ie prices fluctuate according to the underlying basket of shares 

– as of May 25 the price per unit (based on the underlying shares) was RM8.70 

– fund performance to be benchmarked against the FTSE Bursa Malaysia Large 30 Index  

– the FBM30etf prospectus was issued by AmInvestment Bank on June 6, 2007 

The government’s objective is to set up RM3.5bil worth of ETFs by year-end. Government-linked investment companies (GLICs) like the EPF and Khazanah will take part in the FBM30etf by selling a portion of their portfolios in exchange for units in the fund. According to a recent report by Bernamathe launch of the Fund will allow government-linked investment companies (GLICs) to reduce their stakes in government-linked companies (GLCs) in exchange for units in ETFs “without exerting selling pressure on the respective shares and the overall market”. Whether the latter will prove to be the case remains to be seen though. Also the degree to which they will do so in the immediate future is currently not very clear. Given that this ETF will only invest in Syariah-compliant stocks, many of the Top 30 banking and financial institutional stocks (Maybank, AMMB etc), for example, would not be affected.

In any case, I’m guessing the sell-down would have to be done very gradually over a stretch of time for the impact to be minimal. We shall see. 

The sell-down by the GLIC’s will increase “free-float” for listed GLC companies and should in theory lead to better demand for Malaysian shares as Malaysia’s weighting in regional and global indices increases in tandem with higher free float. Again, whether this will materialize remains to be seen. 

Some benefits of investing in ETF’s include:

 – Risk diversification, by investing into a portfolio of securities.

 – Low cost of investment into Syariah Compliant Bursa Top 30 market cap stocks

 – Lower management fees compared to unit trust – it is claimed that the total expense ratio and transaction cost is generally lower than that incurred by a unit trust

 – Fund’s price is easily accessible as it is quoted on Bursa

 – Easy to buy and sell as with common stocks 

The fund manager AmInvestment Bank was also responsible for launching the Asian Bond Fund (ABF), Malaysia’s first Bond Index Fund in July 2005.