The Securities and Exchange Commission of Pakistan (SECP) has approved Pakistan’s first debt Exchange Traded Fund (ETF) for listing on the Pakistan Stock Exchange (PSX) Limited.

Senior SECP officials told Business Recorder at the SECP Headquarters on Monday that the country’s first debt ETF will soon be listed on Pakistan Stock Exchange, as the SECP has sanctioned its approval under the newly specified framework for issuance of Debt and Hybrid ETFs.

The SECP has recently introduced the new framework for Debt ETFs, officials said.

The SECP’s new framework is customized to cover specific arrays of sectors, stocks, commodities, bonds, futures and other asset classes.

Since SECP introduced ETFs in Pakistan’s capital market in March 2020, PSX has witnessed successful listing of 6 ETFs, offering several benefits to investors, in terms of asset-allocation, lower-fee-structure, liquidity, convenience-and-flexibility, transparency, security and easy to buy and sell.

They said the debt ETFs, like equity ETFs, are also passively managed and trade on a regular exchange.

Debt ETFs allow ordinary investors to gain passive exposure to fixed income securities such as corporate bonds or Treasuries in an inexpensive way, while Hybrid ETFs allow investment in an index which has both debt and equity securities. Investment in debt ETFs is well suited for investors with a low risk profile, as it provides a strong defensive addition to their investment portfolios.

The new framework specifies the simple procedures for listing, trading, clearing and settlement of ETF units, has paved the way for easy listing of ETFs, one of the fastest growing investment products internationally.

Pakistan Stock Exchange has launched its first two ETFs on March 24, 2020, namely the UBL Pakistan Enterprise ETF (UBLPETF) and the NIT Pakistan Gateway ETF (NITGETF).

In addition to the said two funds, four other ETFs are NBP Pakistan Growth Exchange Traded Fund (NBPGETF), Meezan Pakistan Exchange Traded Fund (MZNPETF), JS Momentum Factor ETF (JSMFETF) and Alfalah Consumer Index Exchange Traded Fund (ACIETF).

Officials explained that the SECP had taken several measures to promote investments in ETFs. These included allowing equity-oriented CIS to take exposure in units of ETFs maximum upto 10% of net assets of such CIS, Reduced Fee to Rs. 250,000/- for first Debt and Equity ETF by an AMC, Allowed AMCs to lend equity securities on behalf of CIS maximum upto 10% of net assets of such CIS out of its equity portfolio, Limits for investment by Employee Contributory Funds in Debt CIS including Debt ETF increased to 50% and Equity CIS including Equity ETF to 30% which can be in Debt CIS or Debt ETF and Equity CIS or Equity ETF of single AMC, Introduction of regulatory framework for debt ETF, VPS allowed to invest in ETF, and ETF included in 37 A and 62 for eligible as a security and tax credit.

The PSX is also doing its part by revising the marketable lot for ETF constituents.

Moreover, the Listing process by PSX was expedited and listing fee for first five ETF was waived; PSX also waived the iNAV and Index maintenance fee for first five ETFs as well for first year.

All these reforms have generated interest from the AMCs but still there is a long way to go to fully reach the potential of ETFs in Pakistan.

SECP noted that there is demand for actively managed Government Debt ETFs.

Accordingly, the regulator is adopting the regulatory framework to enable market for actively managed ETFs, SECP officials added.

The story was originally published in Business Recorder on March 29, 2022.