General landscape of ETFs in Malaysia

Exchange Trade Funds (ETFs) are open-ended investment funds that are traded on stock exchanges and that seek to replicate the performance of a particular market index. ETFs, offer investors exposure to a wide range of asset classes, providing Malaysian investors with a cost-effective way to diversify their investments. (Mark Reijman)

*Note: ETFs offer a more cost-effective way of investing as the lower operational costs are transferred to the customer, making the yearly management fees lower than those of actively managed funds.

Source: VettaFi

The largest ETF ranked by assets under management (AUM) is SPDR S&P 500 ETF Trust (SPY). It is the first ETF listed in the US, launching in 1993, designed to track the S&P 500 stock market index. While the three largest providers of ETFs globally are BlackRock, Vanguard and State Street, who collectively control over 76% of the global ETF market, according to Statista.

While in Malaysia, MyETF Islamic Market Titans 25 is currently the third largest Shariah ETF in the world by asset size, with RM 159,390,268 as of 31 December 2021. The first ETF in Malaysia was the ABF Malaysia Malaysia Index, which was launched on 13 July 2005 and is still actively traded.

In order to improve Malaysia's ETF landscape and enable greater innovation, The Securities Commission Malaysia (SC) revised its Guidelines on Exchange Traded Funds as of October 2018. This allows for the issuance of a greater variety of ETFs in the market, including futures-based ETFs (such as Leveraged and Inverse (L&I) ETFs), synthetic ETFs, physical commodity ETFs and smart beta ETFs.

After the revision, the number of ETFs listed on the Malaysian stock exchange rose from 10 ETFs in 2018 to 19 ETFs in 2022. This comprises one commodity tracker, six equity funds, five Shariah-compliant equity ETFs, one fixed-income fund and six leveraged and inverse (L&I) ETFs.

Key Takeaways

• 76% of the global ETF market are controlled by the three biggest ETF issuers (BlackRock, Vanguard and State Street).
• In Malaysia, there are 19 listed ETFs; ABF Malaysia Malaysia Index was the first ETF in Malaysia and MyETF Islamic Market Titans 25 is the world's third-largest Shariah-compliant ETF.
• The lack of distribution channels and investor education are the primary obstacles to the growth of ETFs.
• ETFs are regulated under the Securities Commission Malaysia to protect investors’ interests.
• Malaysian investors will be able to trade local ETFs and foreign ETFs via Bursa Malaysia, international brokers and Robo advisors.

Factors that restrict the growth of ETFs in Malaysia

Although guidelines had been revised, there is still much room for improvement. Malaysia's ETF market is comparatively small compared to other markets, and investors’ lack of familiarity with ETFs is the biggest hurdle to sector growth. According to Chong Lee Choo, director of ETF and innovation lab at Affin Hwang Asset Management, the lack of distribution avenues for ETFs might be the possible reason.

The growth of the Malaysian ETF market is also restricted by a lack of investor education and awareness about ETF performance. Many people assume that since ETFs are passively managed, returns will be low, but that is not always the case, said Ismitz Matthew De Alwis, chief executive of Kenanga Investors. (Ernest Chan)

From the observation of the FTSE Bursa Malaysia KLCI ETF (represented by the red line), which has a YTD (3/1/2022-17/11/2022) return of -4.4%, compared with the FTSE Bursa Malaysia Kuala Lumpur Composite Index (represented by the blue line) return of -7.5% over the same time period. As the graph below, it can be seen that the ETF also had a higher return than its underlying index for some periods.

Source: Yahoo!finance

Is ETF legal in Malaysia? Regulated under?

ETFs are legal in Malaysia and regulated by the Securities Commission Malaysia (SC). The Securities Commission Malaysia (SC) issues the Exchange-traded Funds Guidelines under section 377 of the Capital Markets and Services Act 2007 (CMSA) with the objective of providing a regulatory framework for exchange-traded funds in Malaysia that protects the interests of investors and facilitating the orderly development of the ETF. Guidelines are issued under section 377 of the Capital Markets and Services Act 2007 (CMSA).

To safeguard the interest of ETF investors, under sections 288(2) and 289(1) of the CMSA, only a management company approved by the SC can act as a management company for an ETF. This ensures that the management company has the requisite experience and expertise to manage the fund in a manner that is consistent with the SC’s objectives for the regulation of collective investment schemes.

Trustees are also involved in ETFs, and they should observe, act, and fulfil their duties in line with the roles and responsibilities that are set out. A trustee should regularly monitor the management company's running and management of the fund and take any other necessary steps to protect the interests of unit holders. (Securities Commission Malaysia)

List and type of ETFs in Malaysia

ETFs that are listed on Bursa Malaysia:

Source: Bursa Malaysia

Not only the ETFs that stated above, there is a variety of ETFs available in foreign countries. Based on Statista, there were 8,552 ETFs globally in 2021, compared to 276 in 2003.

Which platform can Malaysian access to buy ETFs?

1. Bursa Malaysia

Investors can buy or sell ETFs at any time during the trading day through the Malaysian stock exchange, Bursa Malaysia in the same way, that investors would trade stocks. There are 11 ETFs currently listed on Bursa Malaysia, as detailed above. (AskTraders Analyst Team)

2. International Broker Platform

In addition to the variety of ETFs available in Malaysia, investors can also access a more comprehensive list of ETFs worldwide from international brokers such as Interactive Brokers and XTB. This includes ETFs such as SPDR S&P 500 ETF Trust and Vanguard Australian Shares Index ETF (VAS).

3. Robo Advisor

Robo advisors help investors to purchase a number of ETFs according to their risk profiles. This enables investors to diversify their portfolios with a small amount of capital. With Robo advisors, investors can invest in many international ETFs all at once. Some examples of Robo advisors include StashAway, MyTHEO, Wahed Invest, Akru and many more. (Jen-Li Lim)

In addition, there are also many other trading apps in Malaysia that enable investors to access ETFs, such as ETORO and IG

Steps for Malaysia investors to start investing in ETFs

Investing in ETFs is just like investing in stocks. Investors may buy or sell ETFs through a broker, or via online trading during trading hours.

1. Open a Central Depository System (CDS) account and a trading account with a stockbroking firm that is registered in Malaysia. (Mark Reijman) If investors opt to invest in foreign ETFs, they can also use foreign brokers or Robo advisors.
2. After registering for an account, investors can deposit money and start looking for the ETF they want. Investors can compare it with other ETFs before making any decisions. (Kylie Purcell & Avatar Ardiansyah Lubis)

It is always advisable for investors to first identify their own investment objective, gather information for the ETF they are tracking, and understand its dividend policy, fees, and charges before making any investment decision. (Bursa Malaysia)

3. Once investors have made up their minds, investors can put in a buy order and monitor the ETF's performance during trading hours, just like stocks.

Buying example

An investor has RM200 in hand wanted to invest in an ETF with a current market price of RM1. Assume the brokerage fees are RM10, so RM190 is left for the investor to buy 190 ETF units at RM1 each.

Investors should compare the ETF unit price with its IOPV price (also called Intraday Net Asset Value (iNAV). When market volatility is high, IOPV and ETF unit prices can differ greatly. If the ETF unit price is higher than the IOPV price, the investor is probably paying more than the ETF's actual value.(Kylie Purcell & Avatar Ardiansyah Lubis)

Note: IOPV is the value that is intended to approximate the value of the securities held in the portfolio by the ETF fund manager and should closely represent the value of the fund throughout the day.

Hence, it is advisable to set a 'limit order' based on the IOPV price when buying ETF units. This allows the investor to select the price at which they would like to buy the ETF. Once the ETF falls to that price, the order will be executed. (Kylie Purcell & Avatar Ardiansyah Lubis)

The Bottom Line

ETFs in Malaysia are not as common as in other developed countries, more development is needed for ETFs in Malaysia in order to increase investors’ awareness and create more opportunities for ETF distribution. This will, in turn, lead to more quantity and demand among Malaysian investors.

ETFs offer Malaysian investors a way to diversify their portfolios and expose themselves to global securities in a cost-effective and time-saving manner. However, as with any investment, there are potential risks involved and it is important for investors to be aware of these risks and to do proper research to stay updated with the latest information on Malaysia ETFs before making any investment decisions. This can be done by checking issuers’ company websites, Bursa Malaysia ETF Announcement, and other online sources.

Reference

• AskTraders (2022). EXCHANGE TRADED FUNDS | HOW TO BUY ETF IN MALAYSIA?
• Bursa Malaysia. (2022). Exchange Traded Funds (ETFs).
• Bursa Malaysia. FAQs on Exchange Traded Funds (ETFs).
• Ernest Chan. (2020). ETFs struggle to gain traction in Malaysia.
• Jen-Li Lim. (2022). Which Robo Advisor Should You Use In Malaysia?.
• Kylie Purcell & Avatar Ardiansyah Lubis. (2021). A beginner’s guide to exchange traded funds (ETFs) in Malaysia.
• Mark Reijman. (2016). Investing in ETFs in Malaysia.
• Statista. (2022).Market share of largest providers of Exchange Traded Funds (ETFs) in the United States as of September 2022.
• Statista. (2022). Number of exchange traded funds (ETFs) worldwide from 2003 to 2021.
• The Securities Commission Malaysia. EXCHANGE-TRADED FUNDS GUIDELINES.
• The Securities Commission Malaysia. (2018). SC REVISES ETF GUIDELINES TO BOOST RETAIL PARTICIPATION.
• VettaFi (2022). Largest ETFs: Top 100 ETFs By Assets.

Author

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This article is written by Looi Shin Nye, Research Analyst Intern

Looi Shin Nye is currently majoring in Finance and Investment at Tunku Abdul Rahman University of Management and Technology (TAR UMT). Shin Nye joined TED Optimus Sdn Bhd for 3 months as an intern, responsible for research work and article writing. She participates in Bursa Malaysia Derivatives Virtual Trading Challenge 2021. She is an in-house author from TED Optimus.