SECP to attract investment in ETFs

Regulator working to offer tax incentives to ETF unit holders to create level playing field

The Securities and Exchange Commission of Pakistan (SECP) is working with the central bank to attract foreign investment in exchange-traded funds (ETFs) - units of a basket of multiple shares - available for trade at the Pakistan Stock Exchange (PSX).

Besides, the apex regulator of the stock market is working to offer the same tax incentives to ETF unit holders that are available for investment in other similar funds like mutual funds to create a level playing field in the capital market.

“We at SECP are determined to work towards creating a more competitive and efficient playing field for … ETFs through addressing tax disparities, achieving tax credit and also working with the State Bank of Pakistan to allow (foreign) investments in ETFs through the Special Convertible Rupee Account (SCRA),” SECP Chairman Aamir Khan said while speaking at the PSX on Tuesday.

He was speaking at the launching ceremony of two new ETFs, including a Shariah-compliant fund. With this, the total number of ETFs listed at the PSX increases to four. The four ETFs have a total of 20 leading stocks in their baskets from different sectors including cement, gas, banks, fertiliser, power generation and oil and gas exploration. The difference among the four is that some of them are heavy with one sector and others with other sectors.

ETFs are similar to open-ended mutual funds, meaning investors may buy and sell their units at any point in time during working hours. The funds provide opportunities to investors - especially small investors - to buy and sell multiple leading stocks in one go with limited investment.

The difference between the two is that investors know which stocks are part of which ETFs. The stocks remain unchanged for a long time. Their units can be bought and sold in real time through online trading.

On the other hand, mutual funds adopt a strategy to maximise profit by jumping from one stock or sector to others. Unit holders mostly remain unaware of the investment decisions by fund managers. Their units are mostly bought through physical branches and investors have to wait for a couple of days to receive cash in case they opt to sell their units.

Khan said some of the asset management companies (AMCs) were working to introduce more ETFs in future. Existing and forthcoming ETFs will be eligible to trade on bank financing and will be available at the futures counter in the near future.

Khan said stockbrokers and AMCs should be incentivised to encourage the sale of ETF units to attract more investment and increase the number of investors at the PSX, which had remained stagnant at around 250,000 since long. PSX CEO Farrukh Khan said ETFs were a $7 trillion industry around the globe, adding that people had invested in around 10,000 ETFs through AMCs.

SECP Commissioner Farrukh Sabzwari said ETFs were a huge investment opportunity. “The space is vast and we are just scratching the surface (with the introduction of four ETFs during the Covid-19 pandemic).”

Published in The Express Tribune, October 7^th, 2020.

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