The Cabinet has approved proposals by the Securities and Exchange Organization (SEO) for reforming the governing structure of the two major exchange-traded funds of the government.
Majid Eshqi, the SEO chief, made the announcement Monday in a talk with state TV, expressing the hope that the changes would help lead to better functioning of the two major funds.
The government-affiliated ETFs were listed in capital market in mid-2020 and hold stocks in giant state-owned refineries and banks.
They were launched in line with the government’s program to divest stakes to the public under privatization plans and secure funding for the ballooning budget deficits.
In one ETF, government stakes in three banks and two insurance companies were offered. The other holds shares in four refineries.
Eshqi pointed to flaws in the Net Asset Value of the ETFs, noting that the units are traded far below their NAVs. He said the problem has been addressed in the new framework.
NAV represents the net value of an entity and is calculated as the total value of the entity’s assets minus the total value of its liabilities. It is commonly used as a per-share value calculated for a mutual fund, ETF, or closed-end fund.
For an investment fund, NAV is calculated at the end of each trading day based on the closing market price of the portfolio's securities.
As per the new rules, a market making entity is added to the management structure of the ETFs with the mandate to intervene in the ETF trade to narrow the gap between the market price of ETF units and their real value.
Market makers essentially act as wholesalers by buying and selling securities to balance the market — the prices they set reflect market demand and supply.
Market makers help keep the market functioning, that is if investors want to sell a particular security, they are there to buy. Similarly, if they want to buy a stock, they are at hand to make that stock available.
The gap between the NAV of the two ETFs and their current market prices is said to be as high as 35%, which is unacceptable in any functioning equities market.
Based on another decision, the ETF portfolios are to be diversified and managers can include other assets, namely gold, bonds, and the like, in the portfolio of the ETFs.
By definition, ETFs can contain all types of investments, including stocks, commodities, or bonds. The fact that ETFs holds only one type of asset is at odds with their nature as their portfolios usually comprises a sundry of assets.
