ETF trading in secondary market remains dormant

Posted by on 26 November 2019


Despite being late to the party, Indonesia’s exchange-traded fund (ETF) has seen exponential growth since its launch 12 years ago.

The investment instrument’s assets under management (AUM) sharply increased to Rp 15.2 trillion (US$1.08 billion) as of October of this year, up from Rp 557 billion when it was launched in 2007.

The number of issuers also increased from just one to 16 investment managers during the past 12 years.

The president director of the Indonesia Stock Exchange (IDX), Inarno Djajadi, said in Jakarta on Nov. 20 that the number of ETFs listed on the bourse also grew impressively over the years, thanks to the increase in the number of their issuers.

“In 2017, there were 10 ETFs listed on the bourse and the number has grown to 36,” he said on the sidelines of the Indonesia ETF conference in Jakarta. The latest investment manager to list an ETF was Korea Investment and Sekuritas Indonesia (KISI), which listed its KISI IDX Value 30 ETF on Nov. 12.

Similar to a mutual fund, an ETF is a basket of securities that comprise stocks or bonds—that often tracks an underlying price index in Indonesia or other countries. However, unlike mutual funds, ETFs are listed in the stock exchange and can be traded like ordinary stocks.

The instrument is usually popular among institutional investors as it requires a minimum purchase of Rp 50 million in the primary market. It also offers a diversified portfolio as it can consist of hundreds of assets in one basket, as well as transparency as all the assets’ movements in the ETF can be tracked closely by the investors. 

Financial Services Authority (OJK) director of investment management Sujanto said the increase in the number of indices launched by the IDX helped the country’s ETF industry to grow as investment managers have a broader choice of underlying assets for their ETF products.

The IDX has launched nine indices since 2017 in an effort to provide fund managers with varied choices for underlying assets as a passive investment strategy has gained popularity among them. Some of the new indices are based on the price fluctuations of small and medium-sized capitalization stocks, high dividend yield stocks and the most liquid stocks.

However, he said that the bourse, along with the OJK and industry players, should do more to educate investors about the instrument as the impressive growth in the ETF market had yet to reach its full potential.

“ETFs’ total AUM only accounted for 2.7 percent of the total AUM of the country’s mutual funds,” he said, adding that it indicates a low penetration of the product among the country’s investors.

Indopremier Sekuritas’ president director Moleonoto The echoed Sujanto’s statement, saying that only 115 of the country’s 300 institutional investors had put money into the instrument. He said that the main reason for this was the lack of knowledge about the instrument.

“Many investors, both institutional and retail, are still unfamiliar with what the product is and the trading mechanism,” he said.

The lack of appetite from investors is also partly because of the lack of liquidity in the secondary market caused by the difference in pricing between the primary and secondary markets, he said.

Previously, investors who bought ETFs in the secondary market were required to pay a fee for the ETF transactions, as well as fees for the stock transactions. They were also charged a 0.1 percent transaction tax for derivative products.

These fees, Moleonoto said, discouraged many investors from buying ETFs in the secondary market and made the market less liquid than the stock market.

“Fortunately, the bourse and the government have exempted ETF transaction fees and the transaction taxes since September, so we hope the secondary market will be more liquid in the future,” he said.

Inarno of the IDX said the bourse would assess the impact of the exemption of the transaction fees and taxes until early next year. If all went well, he said, the bourse would consider issuing more incentives to lure more investors to participate in ETF trading.

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