08 January 2013

Understanding Exchange Traded Bond and Sukuk (ETBS)

Today, Malaysia achieve its first milestone in Exchange Traded Sukuk, following the launching of RM300million sukuk by DanaInfra Nasional Bhd. This is the first sukuk for retail investors. When we mention about retail investors, which refer to public, are we ready for this kind of new investment? We should better understand first before jumping onto the ship...

In short, ETBS refers to Exchanged Traded Bond and Sukuk. Generally, 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, these was only accessible 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.

What are ETBS ?
ETBS are fixed income securities, also known as bonds or sukuk (syariah compliant bond), 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.

Why Invest in ETBS ?
Here are some of the reasons to invest in ETBS:

  1. Flexibility and ease of trading on Bursa Malaysia
  2. Transparency, as ETBS are listed on the bourse, investors will have access to real-time prices and volumes, just like shares, with up-to-date information.
  3. Diversification by including ETBS in your portfolio, to complement your investments in other asset classes.
  4. Additional income stream, from the steady income stream through regular coupon payments.

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

  1. Price and Yield
    • It's all about demand and supply in the marketplace. High price, low yield. Low price, high yield. Since the coupon payments for an ETBS are generally fixed to the principal value of the bond, what you pay (price) is crucial to determine the yield.

  2. Interest Rates
    • ETBS is sensitive to interest rates changes. Supposing the average interest rate available to investors goes up, the ETBS' current yield will become a less attractive investment. This would caused a decline in the price of ETBS; until when the yield becomes competitive with prevailing rates. The reverse occurs, if interest rates go down.

  3. Credit Risk
    • Essentially, credit risk is the likelihood that the issuing entity will or will not be able to repay principal amount and its interest element at maturity. As such, corporate ETBS has higher risk than most government ETBS. It was evaluated and rated by rating agencies, such as MARC, RAM, Moody's and S&P. A top rating (AAA) means the ETBS carries the least credit risk (not without risk). Ratings can be upgraded or downgraded, thus, affecting the price.

  4. Maturity
    • Longer maturities have more risk and tend to priced lower (or have higher yields), because of uncertainties in future. Eventually when ETBS start to approach their maturity date, their prices start to get close to the par value.

Please take note that the minimum board lot size for ETBS is 10 units, versus 100 units for shares. You can start trading ETBS simply by opening a CDS account, just like share trading. Happy trading!!!

Source: Bursa Malaysia


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