Bangkok--1 Sep--SET
Exchange traded funds (ETFs) boost liquidity and business opportunities, while meeting investor demand, according to a recent study carried out by The Stock Exchange of Thailand (SET).
SET Note No. 7/2006, “Equity ETF in Thailand: Opportunities and Obstacles”, noted that an equity ETF is an effective alternative to direct equity investment for those investors wishing to lower their exposure to risk. Furthermore, the addition of equity ETF to the market creates additional business opportunity for the securities industry, SET Senior Vice President Dr. Sethaput Suthiwart-narueput said.
“In a nutshell, equity ETF is an open-ended fund listed on the exchange, which can be traded easily just like stocks. However, its administrative costs are low and it reduces risk through diversification, rather like an index fund, ” Dr. Sethaput said.
Equity ETF has distinct advantages over stocks and open-ended funds. Like stocks, an equity ETF must be traded through brokers, has no project life, and its price movement is reported in real-time. Compared to open-ended funds, ETF is similar to an index fund where investors can increase or decrease investment units in real-time. However, unit prices are not discounted like other listed investment units, because equity ETF can have market makers and opportunities for arbitrage.
The lower risk-exposure of this investment product, underpinned by derivatives and equity market indices, should appeal to the less-experienced investor. Introducing equity ETF will increase liquidity in equity and derivatives trading, and provide further business opportunity for securities and investment management firms, without any negative consequences.
“Because the fund invests in a basket of stocks, it automatically provides the retail investor with diversification, protecting them from the fluctuations of particular equities. Their investment will also be managed by professionals. In comparison to other products, equity ETF is more liquid as its units will be traded on the Exchange easily and quoted in real-time. There will be at least one market maker responsible for maintaining the fund’s liquidity,” Dr. Sethaput added.
To introduce equity ETF to the Thai market successfully, several things need to change. Thai investment culture favors picking stocks rather than investing in mutual funds, and the infrastructure does not support market makers. The trading channel is still limited to securities firms, with none available for fee-based advisory firms.
“When making investment decisions, Thai investors tend to choose funds with active management policy, rather than index funds. Currently, Thai index funds make up only 2% of the total equity fund market, or about THB 7.0 billion,” Dr. Sethaput added.
According to the SET Note, successful equity ETF requires greater demand, a liquid underlying index which supports market-making activities, and a mechanism facilitating arbitrage. Thus, to facilitate equity ETF introduction, the Thai market needs to undertake a market analysis, marketing, education, demand stimulation, investment cultural change, and modification of its rules and regulations to facilitate intermediaries.
“Having examined the potential opportunities and threats involved, our market consultation will continue, including an ETF Forum entitled “Launching the First Equity ETF in Thailand : Issues, Obstacles and Opportunities”, to be hosted by SET and Securities and Exchange Commission (SEC) on September 18, 2006. Experts from leading global funds, such as Barclays Global Investors (BGI) and State Street Global Advisors (SSgA) with experience in launching and managing ETFs, will be invited, as will Citigroup, which acts as a market maker for leading ETFs. Subsequently, we will undertake a market survey to ensure the product meets market demand,” the SET SVP said.
ETF is well-accepted globally, with total assets internationally (THB 18 trillion; approx. USD 473.68 billion) earning a compound annual growth rate of 70% or, in other words, almost doubling every year since 1993. Other Asian exchanges such as Korea, Singapore, Malaysia, and even China, have already introduced ETFs.
For more information on SET Note research, as well as developments in Thai and foreign capital markets, please visit the SET website at www.set.or.th/setresearch
For more information, please contact the Corporate Communications Dept.:
Ladawan Kantawong Tel: 0-2229-2036 / Kulvida Jintakawong Tel: 0-2229-2037 /
Nattaporn Boonprapa Tel: 0-2229-2049 / Watsamon Saowakhonsathien Tel: 0-2229-2797