KARACHI: Alfalah GHP Investment Management Ltd is going to list on the bourse its first exchange-traded fund (ETF) on Jan 17, said company CEO Nabeel Malik while speaking to Dawn on Saturday.

Traded on the exchange like an ordinary stock, ETFs let investors take exposure to a basket of companies while combining high returns of direct stock investing with the diversified base offered by mutual funds.

The ETF will track the Alfalah Consumer Index, which is a benchmark consisting of 20 stocks from seven sectors that happen to be direct beneficiaries of growing consumer demand in the country.

It’s going to be the sixth ETF to trade on the Pakistan Stock Exchange (PSX). The most recent one, JS Momentum Factor ETF, started trading on the PSX on Jan 7.

CEO hopeful Sharia-compliant product will attract all kinds of investors

“The focus of almost all the ETFs launched so far has been on index heavyweights. However, each of our economic growth spurts has been driven by consumer demand. Our age dynamics are very favourable,” said Mr Malik. A few particular sectors of the economy grow substantially whenever the country’s GDP growth exceeds four per cent, he added.

The consumer-oriented sectors represented in the upcoming ETF are cement (four companies), engineering (four companies), textile composite (four companies), auto assembling (two companies), food and personal care (two companies), oil and gas marketing (two companies) and pharmaceutical (two companies).

The index will rebalance every six months to include top companies with the highest free float-based market capitalisation in each of the seven sectors. In addition, it’ll include stocks with a one-year daily average trading volume of 100,000 shares or above.

Investors will be able to buy and sell the basket of 20 companies in a lot size of 500 units carrying the face value of Rs10 each.

Does the focus on consumer stocks mean the investors will lose out on index heavyweights from the banking and energy exploration generation companies, which have dominated the most investible space on the PSX since forever?

“With the exception of banks, index heavyweights don’t really have that big of an impact on consumption-driven demand in the economy,” said Mr Malik.

“Banks have high market capitalisation, which would’ve resulted in high weights in the index. Secondly, we wanted a Sharia-compliant product to attract all kinds of investors,” he added.

The previously listed ETFs have received poor response from investors in terms of the average daily traded volumes — a phenomenon that Mr Malik attributes to a lack of awareness about the advantages of the ETF.

He said his company is actively working on another ETF whose underlying assets will mainly be treasury bills and Pakistan Investment Bonds.

It’ll allow stock investors to divert their investments to fixed-income securities as soon as they decide to reduce their exposure to the equity market for whatever reason. “There’s a lot more liquidity available in that segment,” he added.

Current regulations allow the total expense ratio (TER) — a measure of all costs associated with managing and operating a fund — of up to 2.5pc. ETFs listed on the PSX have TERs of 2pc on average which, Mr Malik acknowledged, is higher than the global standard of 1pc or less.

“TERs will automatically come down once the size of ETFs grows. Please remember that trillions of dollars are invested in ETFs globally while the size of all local ETFs is up to Rs300 million,” he said.

Published in Dawn, January 9th, 2022