The Securities Commission (SC) Malaysia issued new guidelines in November 2018, which allows a diverse range of ETFs in the market, including leveraged and inverse (L&I), synthetic, commodity, and smart beta ETFs.
The initiative comes two years after a task force of the SC recommended measures to facilitate local ETF market with the introduction of innovative products.
It has been almost 15 years since AmInvest launched the country’s first ETF, the ABF Malaysia Bond Index Fund, which tracks the performance of the Markit iBoxx ABF Malaysia Bond Index, in 2005.
Since then, the market has made little progress in AUM growth and product innovation, lagging way behind its regional rivals Singapore and Hong Kong.
As of October 2018, there were only 10 ETFs listed in Malaysia with a combined market capitalisation of 2.03 billion ringgit (US$485 million).
Galvanized by the new initiative, two local asset managers, Kenanga Investors and Affin Hwang Asset Management, express interests to dabble into alternative ETFs. They’re trying to steal a march on each other with the launch of the country’s first L&I ETFs.
Kenanga Investors, which currently does not offer ETFs, formed a strategic partnership with Taiwan’s Yuanta Securities in May 2018 in order to pave for way for expansion of its passive investing business.
Yuanta is the largest ETF manager in Taiwan with strong track records in L&I and other innovative products.
Ismitz Matthew De Alwis, executive director and chief executive officer of Kenanga Investors, previously told Asia Asset Management that the company plans to launch a 2x leveraged ETF by the end of this year, subject to regulatory approval.
Affin Hwang also teamed up with Korea’s Samsung Asset Management last November to drive its product innovation including L&I ETFs.
Affin Hwang currently manages two ETFs: TRADEPLUS Shariah Gold Tracker (0828EA) and TRADEPLUS S&P New China Tracker (0829EA). Affin Hwang’s managing director Teng Chee Wai previously said the company aims to leverage Samsung AM’s ETF expertise to pioneer a new range of ETF strategies to meet the growing needs of investors.
Meanwhile, Hong Kong-based fund manager Value Partners is also seeking to gain access to the market. The company’s quantitative investment solutions managing director David Quah says its Malaysia office, which was opened last year, plans to roll out innovative ETFs and looking to launch innovative ETFs and Shariah-related funds.
Despite the positive response from asset managers, investor education remains a major concern for regulator.
As such, the SC has required that L&I products are only accessible to experienced individual investors because of their greater complexity and the risks around the compounding of daily resets.
The regulator requires that prospective retail investors must meet certain pre-qualification before they can invest in these products, while first time individual investors must undergo an e-learning module developed by Bursa Malaysia.
Overall, L&I ETF market landscape has been evolving across the Asian region. For instance, Hong Kong’s CSOP Asset Management and ChinaAMC (Hong Kong) rolled out the city’s first two-time inverse products over the past few months.
According to a Hong Kong-based fund manager, -2x inverse ETPs are a new idea in Asia, even advanced ETF markets like South Korea don’t have such products.
“Investors are more eager on inverse products as they’re looking for tools to hedge against market volatility. However, we don’t see any significant increase in capital flow into overall L&I products,” the manager says.
“If market volatility triggers investors to buy more inverse products, it will also drive capital away from the related leveraged products. It’s just like a zero-sum game,” he adds.