Struggle continues for launch of country’s maiden ETF

The country’s first exchange traded fund (ETF), the LB Multi Asset Income ETF, failed to secure the mandatory Tk50 crore private subscription by 3 September, its second extended deadline.

LankaBangla Asset Management, the fund’s asset manager, has requested a six-month extension from the Bangladesh Securities and Exchange Commission (BSEC), pushing the new deadline to 3 March next year, according to sources.

The securities regulator in July extended the deadline considering unfavourable market conditions, which resulted in a tepid response from investors as they preferred high returns from fixed income securities amid inflation and poor stock performance.

Besides, a lack of awareness among investors was also blamed for the weak response. 

According to 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 initial public offering application to raise the remaining Tk38 crore.

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, set to be co-sponsored by local asset manager Frontier Asset Management and London-based emerging and frontier market investment management firm Dawn Global Management.

However, that 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, investors buy ETF units to own a proportional interest in the investment portfolio 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.

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 proportionate weight.

The objective of LB Multi Asset Income ETF 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 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 a sell pressure in the 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.