Tuesday, January 8, 2013

Exchange Traded Bonds and Sukuk (ETBS)

This may be not a very spectacular investment in term of the return when compare to equity market, but it should serve well for one to park their money aside when they feel uncertainty on the share market.


Exchange Traded Bonds and Sukuk (ETBS)

ETBS Banner
Bonds/Sukuk have always been seen as an asset class to hedge when markets are bearish and a means to develop a steady income over many years. But in the past the bonds/sukuk market was accessible only to high net worth and institutional investors.
Now with ETBS, all investors can have access to the bond/sukuk market with ease, via the stock market.
the Marketplace


The Marketplace:
"New Sukuk Asset Class Launches on Bursa Malaysia"


What are ETBS

ETBS are fixed income securities, also known as bonds or sukuk*, that are listed and traded on the stock market. ETBS are issued either by companies or governments (the issuer) to raise funds for their needs. ETBS have varying structures such as fixed rate, floating rate and hybrids.
* Sukuk refers to issues that complies with Shari'ah principles

Why Invest in ETBS?

Here are some of the reasons to invest in ETBS:
  1. Flexibility and Ease of Trading: ETBS are traded on Bursa Malaysia, making the buying and selling of ETBS as easy as trading in shares.
  2. Transparency: As ETBS are listed on the bourse, investors will have access to real-time prices and volumes, just like shares. This will enable investors to continuously monitor their investments and receive up-to-date information.
  3. Diversification: Investors can diversify their portfolio to include ETBS to complement their investments in other asset classes such as equities, derivatives, unit trusts, etc.
  4. Additional Income Stream: Investors can benefit from a steady income stream through regular coupon payments.

What are the factors that determine the price of an ETBS?

  1. Price and Yield
    ETBS pricing and yield are primarily determined by the demand and supply in the marketplace. Investors want as high a yield or return for their investment as they can get, thus when ETBS prices are low, investors are willing to pay less for a ETBS and therefore getting a better yield. In contrast, a high ETBS price would mean returns are lower, as coupon payments for an ETBS are generally fixed to the principal value of the bond.
  2. Interest Rates
    When interest rates change, ETBS prices change in response. This sensitivity to interest rates is one of the key influences on ETBS prices. Supposing the average interest rate available to investors goes up, the ETBS’ current yield will become a less attractive investment. This would result in investor demand falling off, causing a decline in the ETBS price; until the point where the yield becomes competitive with prevailing rates. The reverse occurs if interest rates go down.
  3. Risk
    Investors must consider the credit risk of the issuing entity before investing in its ETBS. Essentially, credit risk is the likelihood that the issuing entity will or will not be able to repay principal amount and its interest elements at maturity.
    This particularly applies to corporate ETBS, because corporations have more risk than most governments.
    ETBS are evaluated and rated by several agencies, including Malaysian Rating Corporation Berhad (MARC) or Ratings Agency Malaysia Berhad (RAM) for Malaysia while Moody's and Standard & Poor's for international rating. A top rating (AAA) means the ETBS carries the least credit risk. If a company's rating is downgraded, the ETBS will normally fall in price because investors won't pay as much for them.
  4. Maturity
    The future is always less certain than the present. In the financial world, uncertainty translates into risk. Consequently, ETBS with long maturities have somewhat more risk and tend to be priced lower (or have higher yields). As these ETBS eventually start to approach their maturity date, their prices start to get close to the par value. That's because investors know they will soon be getting their money, and little credit risk remains.

What are the minimun investment units?

ETBS are traded in minimum board lot size of 10 units per lot size. Given the principal price of RM100.00 per unit, each board lot will cost RM1000, excluding transaction costs.

What are the risks?

  1. Credit risk
    This risk arises if the ETBS issuer is unable to pay the coupon payment on the coupon date or the principal amount to the lender at maturity. Government bonds and sukuk are backed by the central government, thus deemed to have a low credit risk.
  2. Market risk
    This is the risk of price fluctuations and is impacted by the demand and supply in the market.
  3. Interest rate risk
    Valuation of the ETBS may be affected by the changes in interest rates e.g. if the interest rate rises, ETBS prices will fall as investors may relocate their investment to capture a rise in interest rates available in other instruments, for example, in bank deposit.

What are my considerations before investing in ETBS?

Product Comparison
Bonds/SukukShares
Bonds/Sukuk are Debt SecuritiesStocks are Equity Securities
Bonds/Sukuk holder - they are the owner of a bond asset and do not have rights to the ownership of the companyShareholder - an owner of the company
Steady flow of payments known as coupon/dividendsDividend payments based on the policy and performance of the company
Generally less volatileImpacted by market volatility and forces
Time limit or maturity periodDo not have a maturity period, unless delisted
Trade size is 10 unitsTrade Size is 100 units
* Bondholders will rank higher than shareholders in recourse in the event of liquidation.

How and where to start investing in ETBS?

ETBS trade like stocks, and are subject to the same trading payment and settlement rules (T+ 3). You will need to visit your nearest Participating Organisation (stock broking firm registered with Bursa Malaysia) to open a securities trading account and Bursa Central Depository System (CDS) account.

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