Country's first ETF struggles to get private subscription

Infographic: TBS

Because of a tepid response from private investors, the securities regulator has extended the deadline for the mandatory Tk50 crore private subscription in the country's first Exchange Traded Fund (ETF), LB Multi Asset Income ETF, until 3 September.

This marks the second regulatory approval for extending the deadline to secure subscriptions from private investors for the offered units through the electronic subscription system (ESS) platform of the country's two stock exchanges.

Previously, upon receiving an application from LankaBangla Asset Management, the asset manager of the ETF, the Bangladesh Securities and Exchange Commission (BSEC) extended the deadline for private subscriptions to 3 June, originally set for 3 March.

During a period of rising interest rates and declining stock market conditions, private investors did not show sufficient interest to purchase their shares, preventing the ETF from proceeding with its initial public offering (IPO).

As per the regulatory approval, the ETF's target size is Tk100 crore. Out of this, the sponsor, LankaBangla Investments subscribed Tk10 crore, while the asset manager subscribed Tk2 crore.

Once Tk50 crore is subscribed by private investors, the regulator will approve the ETF's IPO application to raise the remaining Tk38 crore.

"Worldwide, the ETF is an excellent tool to increase market liquidity, channelling peoples' money into listed securities. And the regulator eyes such market instruments as part of capital market development," said BSEC Executive Director and Spokesperson Rezaul Karim.

"Investors in the country generally hesitate to participate in collective investment vehicles due to a lack of confidence," he said, attributing this reluctance to a lack of awareness regarding the benefits of the new financial instrument.

Rezaul Karim, however, expressed optimism that private investors will subscribe to the ETF within the extended deadline.

Alongside the LB Multi Asset Income ETF, the regulator in December 2022 approved the trust deed of another planned ETF named FAM DG Bengal Tiger ETF.

This ETF is co-sponsored by local asset manager Frontier Asset Management and London-based emerging and frontier market investment management firm Dawn Global Management. However, the ETF has not yet been offered to any investors.

What is ETF and how it functions

ETFs are hybrid investment products, with many of the investment features of mutual funds. Like mutual funds, an investor buys ETF units to own a proportional interest in the pooled assets, which are generally managed by an asset manager for a fee.

However, unlike non-listed mutual funds, ETF units are traded in the bourses so that they can be bought and sold through brokerage accounts.

ETFs have been available as an investment product for a little more than 20 years in the United States. The first ETF—a broad-based domestic equity fund tracking the S&P 500 index—was introduced in 1993.

According to an awareness note by the asset manager, the global ETF market witnessed a compound annual growth of 8.5% over the last 20 years and the size of the global ETF market was $10.6 trillion in 2023. 

There are currently 190 listed ETFs with an asset under management of RS6,358 billion in the neighbouring country India.

LB Multi Asset Income ETF will be actively managed, which means the asset manager will have discretion to select the constituents of the fund portfolio, unlike the passively managed ETFs where the fund portfolio is made of the constituents of a pre-announced index, with equal weight.

The objective of the fund is to outperform the yield of 10-year Bangladesh government bonds.

Bangladesh General Insurance Company is the trustee of the fund and BRAC Bank is the custodian.

The authorised participants are LankaBangla Securities Limited, Green Delta Securities Limited and United Financial Trading Company Limited.

Authorised participants are required by law to participate in arbitrage opportunities to ensure that the price difference between the net asset value per unit at current market prices of the underlying securities and the ETF unit price at the secondary market ETF does not exceed 10%.

Increasing demand for ETF units in the secondary market results in the creation of more units and supplying them in the market while the asset manager uses the new money to proportionately buy the underlying securities.

And selloff in ETF units results in redemption of some units where asset managers sell off underlying securities and pay cash to the ETF investors through the trustee.