Pakistan Stock Exchange (PSX) has launched the much-awaited Exchange Traded Fund (ETF), an investment product and a collective investment scheme offered by Asset Management Companies (AMC) consisting of a basket of securities that tracks an index.

The product offers significant growth potential due to its transparent nature, low costs and embedded ability to track the index by a passive investment strategy.

ETFs are available to investors on the exchange, through stockbrokers (TREC Holders), and trade like stocks with real-time pricing during trading hours on an exchange. Therefore, they share the characteristics of both open-end mutual funds and stocks.

Initially, two ETFs, namely UBL Pakistan Enterprise ETF of UBL Funds and NIT Pakistan Gateway ETF of National Investment Trust (NIT), were introduced.

The launch of UBL Pakistan Enterprise ETF and NIT Pakistan Gateway ETF will fill the void for a low-cost exchange-traded product and will be instrumental in enhancing the market depth and liquidity.

Internationally, there are more than 8,000 ETFs with aggregate assets under management of about $6.5 trillion by the end of last year, and estimated to grow to around $7.6 trillion this year. ETFs are an integral part of product offerings in the capital markets. The product has a significant presence in over 47 countries.

The virtual launch took place amid high hopes and optimism. It was believed that the first two ETFs introduced at the PSX would prove to be a harbinger of success and prosperity for all the stakeholders and investors of the country’s capital market.

Guidelines for Investors

Why invest in an Exchange Traded Fund

  1. Ease of transaction: Investors can easily buy and sell on the stock exchange.
  2. Diversification: Investors obtain exposure to a basket of stocks by purchasing an ETF unit.
  3. Ease of Liquidity: Investors can transact anytime during market hours.

What is the minimum investment required to open an ETF account?

Mutual funds account can be opened by an AMC for as low as Rs. 5,000 with subsequent investment as low as Rs. 1,000.

ETFs are bought and sold in the stock market through a stock broker of the Stock Exchange. It can be bought with a very small amount. In the odd lot market, even one ETF unit can be bought or sold, whereas in the regular market, the ETFs can be traded in a lot size of 500 units.

Who should invest in ETFs?

ETFs can offer lower operating costs than traditional open-ended funds, flexible trading, and greater transparency by disclosing all holdings, etc. An ETF is one way to invest in the stock market without buying individual stocks.

By investing in an ETF, your money is instantly diversified across all of the underlying securities in the basket. ETFs provide an easy way to diversify across different stocks, commodities, bonds, or other securities in the markets where many ETFs across multiple asset classes exist.

How do I buy an ETF?

A new investor needs to open a trading (brokerage) account with any of the PSX TREC Holders or brokerage firms.

An existing investor of the stock market can buy and sell the ETF units through their existing trading (brokerage) account opened with any of the PSX TREC Holders.

What makes an ETF go up or down?

The performance of an ETF is dependent on the performance of the underlying securities. ETFs, like all financial products, do experience some degree of risk. However, ETFs may face lower specific risk than a particular stock as it comprises of a basket of stocks.

How do ETFs pay out?

ETFs can potentially have two types of returns:

Capital Gains: Investors can trade ETFs like a stock by buying it at a low price and selling it at a high price to realize the profit/gain.

Dividends: The fund manager usually receives dividends from the securities that comprise the ETF basket. The dividends may be distributed to ETF unit holders after the deduction of management fee etc. Dividend distribution policy of the ETFs are described in their Prospectus or Offering Document.

Do you have to pay taxes on ETFs?

Dividend received by Exchange Traded Funds are tax exempted provided 90% of dividend income is distributed to unitholders, however, the ETF holders will be subject to applicable Income Tax on dividend income distributed by the Fund.

Whereas Capital gain arising from sale/disposal of ETFs in the secondary market will be subject to tax at the applicable tax rate as mentioned in Income Tax Ordinance 2001 and shall be computed, determined and collected by the National Clearing Company of Pakistan Limited (NCCPL).

Is there any tax benefit of investing in ETFs?

A resident person other than a company shall be entitled to a tax credit under the Income Tax Ordinance, 2001, on purchase of new Units.

Are ETFs safe?

ETFs like all financial products do experience some degree of risk. However, ETFs may face lower specific risk than a particular stock as they are comprised of a basket of stocks.

How are ETFs priced?

ETFs are designed in such a way that in the presence of market makers and authorized participants, they trade at a price close to their underlying basket price. Investors are informed the indicative NAV of the ETF units/ shares which is disseminated at specified intervals of time throughout trading hours.

Although, because of numerous market forces (demand/supply), there are often times where the ETF will trade at a discount or premium to its indicative NAV.

Are ETFs good for long-term or short-term?

Generally, being passive funds, ETFs are great for long-term investment subject to an investor’s investment objectives (including both risk and return objectives). Most ETFs track an underlying index, and as the index updates, so should the ETF. Investing in ETFs also saves the investor time and money. Investors do not have to do the research and make security-specific investment decisions themselves.

The costs for the ETF are also generally lower than those of any mutual fund units purchased. Investors should make all investments as per the advice of their investment advisor.

Are there any losses associated with ETFs?

Yes, ETFs are subject to market forces and accordingly may rise or fall in value. Investment in the Fund is suitable for investors who have the ability to take the risks associated with financial market investments. Capital invested in the financial markets, in extreme circumstances, could substantially lose its value.

Are ETFs high risk?

Investing in ETF is same as investing in stocks and is subject to the same ups and downs of the market. The performance of ETF may be directly affected by the performance of its component of the basket. However, being diversified instruments, the risk in investing in ETF should be lower than that of investing in a single stock.

Are ETFs good for beginners?

For new investors, investing in ETFs also saves time and money, whereby the investors do not have to do the research and make stock specific investment decisions themselves. The costs for the ETF are also lower than the mutual fund units purchased. However, new investors should understand the risks associated with investing in equity markets.

Do ETFs pay dividends?

The dividends may be distributed from the dividends received against the securities of the underlying basket of securities after deduction of management fee etc.

Are ETFs better than stocks?

Individual stocks and ETFs trade alongside each other on the Stock Exchange. But there are two major differences:

ETFs are generally much more diversified as they are comprised of a basket of stocks. Most ETFs track specific indices, whereas stocks do not. Better is a relative term; investing in ETFs is generally better from a diversification perspective.

Do ETFs have fees? What is the FEL or Management fee for ETF?

ETFs are traded in the secondary market (Stock Exchange) and no front end fee is charged, however, management fee is charged by the fund managers. Please refer to the Offering Document of respective ETF for more details.

Do I have to be a tax filer to buy ETF?

Since ETFs are traded at the Stock Exchange, same conditions will be applied for an ETF investor as for other stock market investors.

Is ETF dependent on KSE-100 Index?

A passive Exchange Traded Fund (ETF) aims to track the performance of an index (aka benchmark or underlying index).

Is ETF Shariah Compliant?

Yes, an ETF can be Shariah-compliant subject to its constituents being Shariah-compliant. Please refer to the Offering Document of respective ETF to know more about its Shariah compliance

Is there an age limit to invest in ETF?

Any investor having an account with a TREC holder can invest in ETFs.

What is the role of a Market Maker?

The role of the Market Maker is to provide liquidity in the market. Market Maker shall quote buy/sell prices during Designated Market Making Period as per the regulation of the stock exchange.

How is the market price of an ETF determined?

Investors can trade in ETFs based on the available bid-and-ask quotes/prices appearing on the trading screen. Thus, the trading price of an ETF is determined by demand and supply in the market.

Furthermore, the Net Asset Value (NAV) of an ETF (assets minus liabilities on a per unit basis) is calculated by the ETF fund manager and published daily after the close of the stock market for investors to actually gauge the underlying value of their holdings.

In addition, the investors also have the benefit of Indicative NAV available at specified frequency during the trading hours to help them make a trading decision.

What should I do before investing in an ETF?

Like making any other investment decision, investors are advised to know the following before investing:

  • Their own risk and return investment objectives.
  • Investment objective and strategy of the ETF.
  • Information on the index that the ETF is tracking.
  • Fees and charges that will be borne by the investor.
  • Information of the management company of ETF.
  • It is advisable for investors to consult an independent investment advisor prior to making
  • Investment in equities, ETFs, mutual funds or any other security.

If you want more details about the Exchange Trade Fund and curious to invest in this product, Please read more features of the product from PSX official website.

The post PSX Launches Exchange Trade Fund To Attract Investments appeared first on .

Originally Published on ProPakistani.com

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