The Pakistan Stock Exchange (PSX) on Friday formally launched the fifth exchange-traded fund (ETF) in a row to facilitate the investors trading its units, expecting that the algorithm-based first fund - which tracks and includes top 10 stocks with respect to growth in their prices and returns - would increase trade activities.
Besides, officials are in talks with the regulators to allow investors to acquire ETF units with borrowed money, because making ETFs eligible for bank financing will accelerate trade activities to the expected high levels in the stock market.
JS Momentum Factor Exchange Traded Fund (JSMFETF) is the fifth ETF in a row. The algorithm-based first ETF at PSX automatically tracks and baskets top 10 stocks with respect to the total return (including growth in their prices, dividend, bonus and right shares) recorded in the past one month.
The ETF would be recomposed with the new top performing stocks every month. The inclusion of fresh stocks would be based on their performance in the previous month, according to an official and the ETF prospectus.
“The theory behind the momentum is that stocks whose prices have consistently risen for a given period of time are likely to maintain the uptrend.”
Prior to this, the PSX launched four ETFs over the past one year. They track and basket top stocks on the criteria of rich market capitalisation, top stocks in the KSE-100 Index and KSE-30 Index, sector-specific stocks like energy and basket stocks of state-owned companies only.
The stock market has also announced the launch of sixth ETF next week.
JSMFETF’s unit price dropped 0.9% (or Rs0.09) to close at Rs9.96 with 1.35 million shares changing hands at the PSX on Friday. It was unofficially launched a week ago at Rs10 per unit. It hit a high of Rs10.18 during the week.
It consists of 10 stocks from different sectors including technology, food, cement, energy, fertiliser and automobile.
Addressing the participants at the launch of the product, PSX Managing Director Farrukh Khan said ETFs were rapidly becoming the product of choice in stock markets around the world.
The number of ETFs has surpassed the number of stocks in many markets around the world including Nasdaq. “ETFs have attracted investment worth $9 trillion around the globe,” he said.
He directed the stockbrokers and asset management companies (AMCs) to train their staff to better educate retail and institutional investors about the ETFs and enable them to take positions in them accordingly.
Speaking on the sidelines of the event, Khan told The Express Tribune that the market had got off to a good start in 2022.
“Stability in macros of the (national) economy and outstanding financial results by the listed companies will help the market to offer higher returns during the year.”
“New products need time to take off and ETFs are gaining rapid traction since they were launched in Pakistan during the Covid-19 pandemic. Investor education and better marketing will help enhance trade activities in them,” he said.
JS Global CEO Kamran Nasir said in response to a query “yes, we are in talks with regulators to allow margin financing for ETFs. The financing will allow investors to take meaningful positions in units of the funds and generate the expected volumes.”
Addressing the audience, JS Investments CEO Iffat Zehra Mankani said that the firm found the present time to be most appropriate to launch Smart Beta - JS Momentum Factor Exchange Traded Fund, as “the market is now mature enough.”
The firm plans to launch more factor-based (like earnings per share, cash flow per share and dividend per share) ETFs.
Out of 240 months of back testing of the ETF, the strategy outperforms 51% of the time. “On average, the strategy returns 5.1% in positive months and declines by 3.4% in negative months.”
“The evidence for momentum (growth in share price) in markets is very strong and it is supported by almost two decades of academic research in US equities as well as markets outside of the US,” she said.
“Our back tests of the ETF strategy reveal that the momentum has also outperformed our local stock index.”
Over this period, JSMFETF returned 25% per annum versus the KSE All Share Index returned 19% per annum, she said.
Published in The Express Tribune, January 15th, 2022.
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