But, since the Stock Exchange of Thailand (SET) aims to have Thailand's first Exchange Traded Fund (ETF) that links with the securities index working on the Thai bourse by the second quarter of next year, it's about time to get to know the new product.

What is an ETF?

An ETF is an open-ended fund that tracks specific indices and can be traded like securities.

How does it work?

An ETF will mainly involve five parties: the SET, a fund manager, a trustee, an index vendor and a participating dealer.

An asset-management company will join forces with a securities firm - which will act as a participating dealer - to set up an ETF. Only the participating dealers can create or redeem the unit trust.

The tracked stocks selected to create the ETF will be weighted according to the analysis of the fund manager.

Investors will trade them via brokerage firms.

Who will run ETFs?

The SET will consider proposals submitted by asset-management companies that have teamed up with brokerage firms.

However, forget about the complexity involved in setting up ETF shares on the stock market. That's the responsibility of the five parties mentioned above.

The ETF is a virtual company stock. Investors can trade it like other shares via brokerage firms or Internet trading. The price is quoted in real-time, like other normal stocks, but the investment risk is diversified like an index fund. Tax from gains on ETFs will be waived, similar to investments in mutual funds.

Investors can also trade ETFs with whatever brokerage firm they are registered with.

Besides the benefits, the fees for ETF trading are lower than mutual funds because of the passive style of investment.

Who needs ETFs?

ETFs are for those investors who prefer to trade several stocks at the same time.

Those who are fond of trading single stocks don't need it and neither do those who prefer mutual funds for the long term.

Will ETFs be a success?

The global ETF market had a net-asset value of more than Bt18 trillion in May, with a compound annual growth rate of about 70 per cent.

In our region, ETFs are traded in South Korea, Taiwan, Singapore, Malaysia and China.

SET senior vice president Sethaput Suthiwart-arueput said the creation of ETFs in the Thai market is a bid to offer more products on the Thai bourse at a time when fewer large companies are being listed.

Is the Thai bourse ready for ETFs?

Sethaput said regulations are to be revised to support the launch of ETFs. However, some restrictions, such as the number of distribution channels, cannot be changed.

The most important factor is the investment culture of Thai investors, who are usually day traders and don't like index funds.

Although introducing and promoting ETFs on the Thai bourse is a huge task, it had to happen sooner or later, Sethaput said.

Since it is sooner rather than later, investors can visit the website www.set.or.th/setresearch/setresearch.html to gather more information.

Can only equities be used in ETFs?

Bonds and commodities can also be used.

As a matter of fact, the first Thai ETF is the Thai Asian Bond Fund, whereas the SET is aiming for an ETF linked to the securities index. Due to a lack of liquidity and difficulties in understanding, the Thai Asian Bond Fund is not well known to Thai investors.

For a commodities ETF, StreetTracks Gold Trust has been widely traded as an ETF share in many countries. Tomorrow, StreetTracks Gold Shares, a fractional, undivided beneficial ownership interest in the StreetTracks Gold Trust, will make its debut on the Stock Exchange of Singapore. Exchange Traded Fund

has first been introduced to the global market over 13 years ago, for the

Thai investors, it's remained doubtful how this financial tool works.

As the SET is putting its effort to make the first Exchange Traded Fund (ETF), that links with securities index, happen in the Thai bourse by the second quarter of next year, it's never too late to get yourself pre pared for the new product to come.

Piyarat Setthasiriphaiboon

The Nation