Apart from expanding the capital market's product range, ETFs are expected to be a catalyst in building greater liquidity within the equity market, consistent with the broad objectives of the Capital Market Master Plan (CMP).

The introduction of ETFs will add variety to the current class of investment funds listed on the stock exchange, and is in line with the developments in other regional markets. Other types of funds currently listed and offered to investors on the stock exchange are closed-end funds (CEF) and real estate investment trusts (REIT).

The SC formulated the Guidelines on Exchange Traded Funds (ETF Guidelines) in consultation with various industry professionals including the Association of Stockbroking Companies Malaysia, Malaysian Association of Asset Managers , Association of Merchant Bankers Malaysia, Federation of Malaysian Unit Trust Managers and Bursa Malaysia Bhd.

An ETF is an open-ended investment fund that tracks a particular index. It is a passively managed fund and depending on the benchmark index, provides exposure to a certain market or sector. An ETF would be listed on Bursa Malaysia Securities Bhd and would be traded in the same manner as a stock. It would usually be traded very closely to its net asset value (NAV) and investors are able to buy and sell ETF units in real time prices.

As an open-ended fund, ETF units can be continuously created and redeemed by the institutional investors, thereby providing the necessary liquidity to maintain a balance of supply and demand in the market. This unique structure and mechanism of an ETF allows investors to arbitrage any discounts and premiums that may arise between the price of the ETF and its NAV.

ETFs are essentially structured as unit trust funds and as such, the provisions in the ETF Guidelines largely mirror those in the Guidelines on Unit Trust Funds and the Guidelines on Real Estate Investment Trusts, such as the provisions relating to the management company and the trustee of the fund.

The ETF Guidelines also contain provisions that are specific to ETFs, such as those relating to Participating Dealers who are essentially stockbroking companies or financial institutions appointed by the management company as the intermediary for the creation and redemption process and who may also be acting as market-makers.

The ETF Guidelines are available on the SC website here.