According to Bonnie Choy, senior officer for product development and marketing promotion at the KLSE, the idea is to provide product diversification for investors, as well as enhance liquidity and reach for mutual funds in Malaysia. She said that Malaysia is still in the planning stage as far as ETFs are concerned, but the KLSE is considering both government-backed ETFs such as the Tracker Fund in Hong Kong and those by private-sector players. It may even allow existing domestic funds to list on the KLSE. Whether the ETFs would track the Kuala Lumpur Composite Index or other indices is yet to be determined.

The idea of ETFs in Malaysia has met with mixed reactions. Some fund managers see ETFs as the means of taking the Malaysian fund scene towards a higher degree of sophistication and maturity, whilst others are sceptical of the appeal of index-linked products. Yaw Phang Chan, fund manager at Bankers Trust Asset Management in Kuala Lumpur, said that the firm had contemplated creating index funds, but scrapped the idea in favour of handpicking stocks rather than adopting passive management. He said: 'In markets like this, you’d be doing your investors a service by not tying them to the index, and managing their investments actively.'

Other fund managers see ETFs as bringing pricing transparency and liquidity to mutual funds in Malaysia, and believe that the provision of easily traded funds at competitive prices would entice investors. A government-backed ETF may also introduce many Malays to mutual funds for the first time, thereby indicating huge growth opportunity for the domestic fund industry.