An exchange traded fund (ETF) is a pooled investment vehicle that holds a basket of securities and tracks an index or asset class. The shares in an ETF are traded in real time on the Stock Exchange of Thailand (SET) in the same manner as other listed securities. An ETF is first created, and then its shares made available for investors to buy and sell, as a result of the interactions between 3 key entities.
An ETF is initially established by an asset management company (AMC) that documents the fund’s investment objectives, and the index, or other bench mark, that the fund will seek to track. The AMC is also responsible for ensuring that the fund is listed on the SET, creating and redeeming the shares in the fund, balancing the fund’s underlying portfolio of assets, distributing any dividends, and reporting the composition and value of the fund’s assets.
An authorized participant (AP) enters into an agreement that empowers it to order and redeem batches of shares in the fund with the AMC. These shares are then offered on the SET for investors to buy and sell. To obtain a new batch of ETF shares, the AP must hand over to the AMC the rights to a commensurate bundle of securities (or other assets) that are then used by the AMC to balance the ETF’s underlying portfolio.
A market maker (MM) accepts the risk of holding a required quantity of shares in the fund and is responsible to buy and sell if no one else does in order to maintain liquidity in the bid-offer spread. The roles of both the AP and the MM are usually assumed by the same organization, a broker or other large institutional investor.
A simple overview of the workings of a Thai ETF is provided in the diagram below:
Why are ETFs so popular?
ETFs have become very popular in markets all around the world. They first appeared in America back in the 1990s and since then the demand for this type of investment product has grown remarkably. Over the last decade in the United States for example, investment in ETFs increased twelve-fold from $170 Billion to $2 Trillion. And during just the last twelve months in Australia, ETF funds under management have increased by more than 20%.
Here are five reasons why people like to invest in ETFs:
Transparent Pricing: In simple terms, the net asset value (NAV) of an ETF is the sum of its assets minus its liabilities. The indicative net asset value (iNAV) for an ETF is posted continuously to the market throughout the course of a trading day. Because the iNAV is available in real time, the market price of ETF shares tracks in close proximity to the net value of the underlying assets held by the fund. In contrast, an equities based mutual fund is only required to report the NAV of its portfolio of assets on a quarterly or semi-annual basis. It follows that investors regard an ETF as providing greater transparency regarding pricing than that offered by a mutual fund.
Easy to Buy and Sell: Buying an ETF is a lot easier than investing in a traditional mutual fund. Shares in an ETF are bought and sold on the main board of an exchange alongside common stocks and other listed securities.
Tax Efficacy: ETFs are viewed as much more tax efficient than traditional mutual funds. This is because an ETF that tracks an index has a low turnover of its portfolio assets and thus generates fewer taxable events (realizations of a capital gain). In contrast, an actively managed equities mutual fund can have a portfolio turnover of more than 100%.
Access and Diversification: ETFs enable investors to gain access to markets or asset classes that would otherwise be difficult for them to obtain. Investment in the bond market is a relevant example. Buying shares in an ETF that holds a basket of securities is also a quick and easy way for someone to diversify the exposure of their investment portfolio.
Lower Management Fees: The management fees charged by an actively managed mutual fund are usually significantly higher than those charged by a passively managed ETF that tracks an index. Many financial commentators argue that paying these higher fees is a waste of money because stock picking does not work and, in the long run, actively managed mutual funds seldom perform better than relevant underlying indexes. It would seem that a good deal of investors are listening to this argument and voting with their feet. In recent years there has been a lot of money flowing out mutual funds and into ETFs.
What ETF products are available in Thailand?
There are 15 ETFs currently listed on the SET.
You can view live price quotes for each of these funds on our Tickers page.
You can also click on the relevant link in the table below if you want to review the profile and information page for a specific fund:
|Code||Tracking Index||Asset Class||Manager|
|1DIV||SET High Dividend||Thai Equity||Kasikorn|
|BMSCITH||MSCI Thailand||Foreign Index||Bangkok|
|CHINA||CSI 300||Foreign Equity||Krungthai|
|EBANK||SET Banking Sector||Thai Equity||Krungthai|
|ECOMM||SET Commerce Sector||Thai Equity||Krungthai|
|EFOOD||SET Food & Beverage Sector||Thai Equity||Krungthai|
|EICT||SET ICT Sector||Thai Equity||Krungthai|
|ENGY||SET Energy & Utilities Sector||Thai Equity||TMB|
|ENY||SET Energy & Utilities Sector||Thai Equity||Krungthai|
|ESET50||SET 50||Thai Equity||Krungthai|
|GLD||Price Gold Bullion 99.5%||Commodity||Krungthai|
|TDEX||SET 50||Thai Equity||OneAM|
|TGOLDETF||Price Gold Bullion 99.5%||Commodity||Thanachart|
|TH100||SET 100||Thai Equity||OneAM|
How do I invest in a Thai ETF?
You can place orders for shares in an ETF listed on the SET directly with your Thai broker or online via your trading platform. The brokerage fee that you pay to trade an ETF will be similar to that which you pay to trade an ordinary share. The minimum lot size for ETF shares is 100 units. So, for example, if an ETF is currently trading at a market price of 7.50 Baht per share, then your minimum investment amount would be 750 Baht.
Before you invest in an ETF, it is prudent that you first review its prospectus to familiarize yourself with salient information including the fund’s objectives, its management fee, performance history, and risks. The AMC that created the ETF is required to publish an updated factsheet for the fund on a monthly basis.
What are the risks and returns?
The price of ETF shares can, just like regular listed securities, can be adversely affected by a range of factors including the prevailing economic, social, and political outlooks. Investors in an ETF may also be subject to the risk of tracking error. This is the disparity between the returns of the fund and the underlying index it is seeking to replicate.
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.
Investment in a Thai ETF has the potential for two types of returns:
Capital Gains: If you sell shares in an ETF for more than what you paid for them you will make a capital gain. And, if you are an individual investor (not a company), the Thai government will not levy any taxes on your profit. You can read more about this in my articled called Day Trade Thai Shares and Pay No Tax.
Dividends: Any dividends arising from securities held by an ETF will be distributed to the fund’s share holders. The AMC will subtract a fee for attending to those payments.
Is there an ETF listed in the US that tracks the Thai stock market?
Yes. iShares are a collection of ETFs managed by BlackRock. The iShares MSCI Thailand Capped ETF seeks to track the investment results of a broad-based index composed of Thai equities. In a previous article called How to Short Sell the Thai Stock Market I discuss how an investor trading on NYSE can use this iShares EFT to short sell the SET.
Happy New Year!
Well that about wraps up my very first article for 2017.
If you found the information that I provided on Thai ETFs useful, please share it with your family and friends on Facebook and Twitter.
I wish all of my readers all the very best for the year ahead.
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