ETFs are often described as a cross between a unit trust and a share. This guide explains what an ETF is, how ETFs are regulated in Malaysia, and how to check whoever is offering one.
What an ETF is
Under the Securities Commission Malaysia's (SC) Guidelines on Exchange-Traded Funds, an ETF is a listed fund structured as a unit trust scheme. Its main aim is to track the performance of an index or benchmark, using a passive investment strategy.
When the SC introduced ETFs in 2005, it described them as open-ended funds that track a particular index. ETFs are listed on the stock exchange and traded in the same manner as a stock, at real-time prices. Their price usually stays close to the fund's net asset value (NAV).
The SC's guidelines cover both conventional and Islamic ETFs listed on the Main Market of Bursa Malaysia Securities.
Leveraged and inverse ETFs
The guidelines also define two special types. A leveraged ETF aims to deliver multiples of the daily performance of its index or benchmark. An inverse ETF aims to deliver the opposite of the daily performance of its index or benchmark.
Every ETF has a prospectus. Under the guidelines, fees can only be charged to an ETF if they are allowed by its deed and clearly disclosed in the prospectus.
Who regulates ETFs in Malaysia
The SC issues the ETF guidelines under section 377 of the Capital Markets and Services Act 2007 (CMSA). Setting up an ETF and listing it on Bursa Malaysia Securities needs an application to the SC.
The management company that sets up and runs an ETF must hold a Capital Markets Services Licence (CMSL) for fund management. Each ETF also has a trustee, which creates and cancels units in line with the fund's instructions.
An ETF may have a market maker to help keep prices available. Under the guidelines, a market maker must be registered under the rules of Bursa Malaysia Securities.
Since 2009, the SC's guidelines have also allowed foreign ETFs to be cross-listed on Bursa Malaysia, if they meet the SC's requirements.
How to check who is offering an ETF
Because ETFs trade like shares, they are bought and sold through a stockbroking account. Check that the broker, and the ETF's management company, hold a CMSL by searching their names at sc.com.my/investment-checker.
You can also search the names on the SC Investor Alert List and on Bank Negara Malaysia's Financial Consumer Alert List. Take extra care with offers that use the word "ETF" but are not traded on a stock exchange, or that promise unrealistic returns.
SmartChecker shows register records and reviews for the companies it lists, so you can see official information in one place.
Common questions
Is an ETF the same as a unit trust? Not quite. An ETF is structured as a unit trust scheme, but it is listed and traded on the stock exchange at real-time prices.
Who approves ETFs in Malaysia? The Securities Commission Malaysia. ETFs are set up and listed under the SC's Guidelines on Exchange-Traded Funds.
Can foreign ETFs be listed in Malaysia? Yes. Since 2009, the SC's guidelines have allowed foreign ETFs to be cross-listed on Bursa Malaysia if they meet the SC's requirements.