KARACHI: Launched on the Pakistan Stock Exchange (PSX) with great fanfare last year, exchange-traded funds (ETFs) have consistently attracted low volumes despite a surge in the prices of shares that underlie the new investment product.
In fact, there are days when ETFs — a basket of different shares traded on the exchange like a single stock — receive zero interest from investors. The four ETFs listed on the PSX recorded volumes of only 1,000, 1,500, 2,500 and 11,000 units or shares on Tuesday. Their combined trading volume was less than 0.003 per cent of the total number of shares traded on the same day.
“The first and foremost reason for low volumes is a lack of awareness among investors,” said Muhammad Kamran Nasir, CEO of JS Global Capital, one of the three market-makers whose job is to stand ready to buy or sell ETFs to ensure liquidity at all times.
“It’s the collective responsibility of market-makers, brokers, asset management companies (AMCs) and the regulators to create awareness,” he said.
Globally, assets under management of ETFs are to the tune of $8 trillion. Market capitalisation of each of the four locally listed ETFs, however, ranges from Rs46 million to Rs64m only.
Mr Nasir called on stockbrokers to become market-makers for ETFs, which combined high returns typically associated with stock investing with the diversified base offered by mutual funds.
He also urged the regulators to make margin financing available for the instrument to ensure higher liquidity. The move will allow investors to gain exposure to ETFs using borrowed funds available through various margin products — facilities they’re currently using for many of the shares that underlie ETFs.
According to Ammar H. Khan, a Karachi-based economist, one of the reasons for low volumes was that the managers of ETFs were the same AMCs that offered competing products like equity funds at significantly higher fees. Any success of ETFs will cannibalise their income streams, he said.
For example, Meezan Pakistan ETF, managed by Al Meezan Investment, has a total expense ratio (TER) of 1.92pc. In contrast, the TER of an equity fund run by the same AMC under the name of Al Meezan Mutual Fund is 4.06pc.
Talking to Dawn, Al Meezan Investment CEO Mohammad Shoaib said the TERs of equity funds were generally higher than those of ETFs because of the myriad additional fees and charges that AMCs paid on the former. He rejected the idea that equity funds ate into the sales of ETFs. “The two products have different kinds of investors. There’s no sales cannibalisation. It’s like a detergent-maker selling different brands to different consumer segments,” he said.
Mr Khan also alleged that the market-making function, which was crucial for ETFs, was absent from the local market. “Liquidity is sparse or non-existent. At times, one can’t buy or sell at a price close to the net asset value,” he said.
A PSX spokesperson disagreed, saying one could find bids and asks for ETFs “at almost all times”.
“Liquidity is the ability of an investor to get in and get out of an investment at a reasonable cost and time which, in case of ETFs, is ably provided by the market-makers,” the PSX said. As for sales cannibalisation, the spokesperson for the frontline regulator said the phenomenon was “of global nature”.
“The target market for ETFs versus other active funds is a different one and with education and awareness, investors will be well-equipped to choose the one that best suits their needs,” it said. “There is an organic growth phase as well as an investor understanding phase, which follow their due course, subsequent to which, we should see more activity in the volumes.”
Published in Dawn, July 23rd, 2021