Exchange-Traded Funds coming to Pakistan next month 

PSX also contemplates purchasing a new trading system

KARACHI: The Pakistan Stock Exchange (PSX) will begin to offer Exchange-Traded Funds (ETF) for the very first time in 2020, the PSX announced in a session with media on Thursday. 

Though no tentative date has been set by the Securities and Exchange Commission of Pakistan (SECP), the ETFs will be available in anywhere between two weeks to one-and-half month’s time, according to Hassan Raza, Head of Product Management and Research at PSX.

Two asset management companies (AMCs) in Pakistan, National Investment Trust Fund and UBL Funds, will be offering the ETFs. Both ETFs will be offered on the same date. Alongside the two authorized companies, JS Global will be the authorized market maker. Market makers are typically large banks or financial institutions which help create a market for investors to buy or sell securities. 

The process is in its final stages, with the offering document still being worked upon and completed by the SECP and the asset management companies.  

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In the run-up to the final date, Raza said the PSX was testing operational readiness in December 2019. In the last few weeks, the exchange was conducting mock sessions in the after-hours with around 15 brokers, to familiarize people with the new product. 

WHAT IS AN ETF:

ETFs are similar to mutual funds, in that an ETF owns the underlying assets (stocks or bonds) and offers investors a proportionate share in a pool of stocks, bonds, and other assets. 

It is a fund or portfolio of securities, divided into units (shares) of equal value. Similar to a normal share, it can be traded at the stock exchange as well.

The ETFs have Net Asset Values (NAVs), which are derived from the underlying constituents.  The AMCs will provide indicative NAV per share to the investing public throughout the day. The NAV is seperate from the price of an ETF share, which is determined by demand and supply of the ETF.

Unlike mutual funds, ETFs are ‘passive’ investment instruments, as they track a specific market index. Typically, the cost of investing in an ETF is generally lower than in a mutual fund. According to Raza, ETFs are especially favoured by institutional investors and foreign fund investors. 

An ETF is an SECP-approved product offered by asset management companies, and will be available to any investor with a brokerage account. 

In this case, the ETFs will either be a subset of the KSE 100 index or KSE 30 index. 

As per the PSX, the AMCs – in this case, NIT and UBL Funds – are the issuers of the ETFs. The funds’ role is to decide on the index criteria for the ETF based on their own research, looking at aspects such as liquidity and performance. 

This is different from the market maker – in this case, JS Global – which acts as an intermediary between the AMC and the market. The market maker is usually a designated broker firm, decided upon between the AMC and the PSX, whose role is to provide liquidity to the market. It does so by providing units for sale on the stock exchange at asking prices, and then posting bid prices it will purchase units at, for investors wishing to sell.

The ETFs’ lot size is likely to be 500 shares. The SECP still has to approve the fund size. 

“Our objective is to familiarize fund managers with this product,” said Raza, “Practically speaking, there will be a learning curve,” Raza added that the market will grow when a suite of products is offered.

LONG OVERDUE:

Discussions for the introduction of ETFs have been ongoing for the last few years. Previously, former CEO of PSX Richard Morin had said that ETFs would be available in the second half of 2018. 

In September 2019, the SECP approved the necessary regulatory changes required in the PSX rule book for ETFs to operate.

Though this is the first time ETFs are being offered in Pakistan, globally the ETF is a particularly popular method of investing. In 2019, the ETF industry in the United States crossed the $4 trillion mark. According to Bloomberg, ETFs took off after the financial crisis of 2008. 

OTHER INITIATIVES:

Looking forward, Raza said that the PSX will offer a new dividend index. The process is in its final stages and will be offered in a month to two months’ time. The PSX is also working on an enhancement plan for futures. Finally, in the long-term, the PSX is tentatively looking to purchase a new trading system. 

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Meiryum Ali
The author is a member of the staff and can be reached at [email protected]
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