The Question
My very first article for 2017 was called Thai ETFs – A Guide to Exchange Traded Funds in Thailand. Soon after it was published, a member of the Thai Shares community asked the following question:
So how does foreign share ownership fit into the picture? If I buy into an ETF does the manager of that fund have to take into account that I am foreign?
This is a good question.
And I understand why it was asked.
You see, if a foreign investor wants to buy stock in a company listed on the Stock Exchange of Thailand (SET), there are are three different types of share made available to him for purchase:
- Local (Ordinary) shares (L)
- Foreign quota shares (F)
- Non-voting depository receipts (NVDR)
If a foreigner buys (L) shares he is not eligible to receive any dividends distributed from the underlying listed company. A foreigner does however receive dividends if he holds (F) shares or NVDRs. (F) shares are problematic to trade and so the net result is that most foreign investors buy NVDR. If you want to learn more about these share types have a look at my article called What are NVDR, (F) Shares, and (L) Shares?
The member who wrote the question highlighted above already knew that he should buy NVDR because, as a foreign investor, he is then eligible to receive any payment of dividends.
But then my latest article about Thai ETFs arrived in his inbox, he reads it, his interest is peaked (because I write killer articles 🙂 ), he surfs around online doing some independent research, and bumps into information like this:
He then thinks to himself, wait a minute, as a foreign investor I need to hold NVDR to ensure that I get paid dividends. But it looks like Thai ETFs don’t issue NVDR, they only issue (L) type shares. Does that mean if I buy (L) shares in a Thai ETF, I won’t be eligible to receive any of the dividends paid by that fund?
The Answer
The first thing you need to know is that three of the Thai ETFs currently listed on the SET, due to the nature of their underlying asset portfolios, do not even pay dividends. That is, the only way that you can make money on these funds is if you make a capital gain when you sell your shares. The three ETFs that have a have a “no dividend” policy are:
- BMSCITH (Index)
- GLD (Gold bullion)
- TGOLDETF (Gold bullion)
The second thing that you need to know is that, if you are a foreign investor, and you buy shares in a Thai ETF that does pay dividends, yes, you will receive them. The rules for (L) type shares in a Thai ETF are different from the rules for (L) types shares in a listed Thai company.
And Just to Make Sure…
Before you pull the trigger on any investment it is prudent that you first do your homework. If you are interested in a specific Thai ETF make sure that you complete your own due diligence before you place your buy order. You should always:
Read the Prospectus: Make sure you understand all of the relevant fine print including: the nature of the fund, its risks, the index (or other benchmark) that it is seeking to track, and the fund’s policy regarding the payment of dividends.
Check the Fund’s Liquidity: Read, and take note of, the following paragraph that I have quoted directly from my previous article called Thai ETFs – A Guide to Exchange Traded Funds in Thailand:
The daily trade of shares in some Thai ETFs is very thin. In such an environment, there is an increased risk that an investor may incur what is referred to as a “gap down” loss. It is therefore important, before you place a buy order, that you first familiarize yourself with the market liquidity (historical daily trading volumes) of the shares in your targeted ETF. Remaining mindful of liquidity, and the risk of gap down loss, will help you to avoid getting stuck in a situation where you are trying to sell your ETF shares, but there are no, or insufficient, buyers in the market.
Confirm that the ETF Pays Dividends to a Foreigner: Email your Thai broker. Ask them to email you back to confirm that your targeted ETF does not issue NVDR, and that it will pay dividends to a foreign investor such as yourself, even if you hold (L) type shares.
Make sure that you hang on to a copy of their reply.
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