Thailand ushers in sale of leveraged ETFs to retail investors

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Thailand has approved the sale of leveraged and inverse exchange traded funds to retail investors starting this month.

The regulatory nod to issue the complex index-tracking products is in line with Thailand’s efforts to strengthen its ETF sector and expand its capital markets.

The Thai Securities and Exchange Commission has said that asset managers can now launch leveraged and inverse ETFs with a maximum multiple of 2 times the performance of their benchmarks, according to an announcement earlier this month.

Leveraged ETFs use derivatives to deliver multiples of the performance of the indices or benchmarks they track, while inverse ETFs use derivatives to profit from the decline in value of the indices or benchmarks.

This article was previously published by Ignites Asia, a title owned by the FT Group.

Asset managers seeking to issue leveraged and inverse ETFs must disclose characteristics and risks associated with the products.

Managers would also be required to use a name that accurately reflects the investment strategy, disclose investment methods, tools used and related fees, as well as include a performance simulator to show profits and losses for leveraged and inverse ETFs, based on the release.

Meanwhile, securities companies and brokerages that distribute leveraged and inverse ETFs would need to “take additional steps” to ensure investors are sufficiently aware of the risks associated with these products.

This should include ensuring sellers have knowledge and understanding of the products before offering them to investors, according to the document.

Thai mutual funds that invest in leveraged and inverse ETFs must comply with this new criteria within 90 days.

The announcement comes around four months after the Thai SEC first proposed in late November a framework to support leveraged and inverse ETFs in the local market.

At the time, the regulator said it wanted to provide investors with a wider range of investment tools and make Thailand more competitive with other Asian markets where leveraged and inverse ETFs had been available for sale.

Thailand’s domestic ETF market is relatively small in terms of the number of products and asset size. Only 11 ETFs were listed on the Stock Exchange of Thailand as of March 18, with combined assets of Bt18bn ($536mn).

Thio Boon Kiat, Singapore-based group chief executive at UOB Asset Management, said the south-east Asia ETF markets, including Thailand, had “disappointed” in terms of their lagging growth.

UOBAM partnered with Mirae Asset Global Investments (Hong Kong) in 2022 to launch two ETFs on the Thai stock exchange. This includes the United Robotics and Artificial Intelligence ETF and the United Hero ETF, which invests in the e-sports and e-gaming sectors.

Growth in Thailand’s ETF landscape was hindered by the bank-dominated intermediary channels, Thio told Ignites Asia earlier this month.

“Banks are the bigger part of the distribution space, and there’ll be more resistance,” he said.

Other regional markets have also attempted to use innovative products such as leveraged and inverse ETFs to boost retail participation, such as Malaysia in 2018, but such efforts have not borne much fruit.

In June, the Thai SEC approved the first bitcoin ETF for high net worth and institutional investors. It also welcomed the debut of the first ethereum ETF last month.

Elsewhere in Asia, other local regulators have made contrasting moves when it comes to these riskier products.

In January, Hong Kong’s securities regulator announced that asset managers would be permitted to launch leveraged and inverse ETFs tracking single stocks overseas.

However, Taiwan’s financial regulator ruled out leveraged and inverse products in its new regulatory framework for active ETFs released last year.

Meanwhile, retail investors in South Korea in 2023 started exhibiting strong appetite for leveraged and inverse ETFs.

*Ignites Asia is a news service published by FT Specialist for professionals working in the asset management industry. Trials and subscriptions are available at ignitesasia.com