Kenya's financial market regulator on Monday announced a plan to introduce the trading of Exchange Traded Funds (ETFs) to improve liquidity and eventually diversify the capital markets in the East African nation.

The Capital Markets Authority (CMA)'s CEO Paul Muthaura said the establishment of ETFs will help address the issue of relatively low market liquidity, one of the key challenges that the capital markets have faced over the years.

"ETFs will also make it easy to invest in a targeted portfolio of common stocks and bonds by investors purchasing just a single security," Muthaura said in a statement issued in Nairobi.

An ETF is an investment fund traded like other securities on securities exchanges, much like stocks. An ETF holds assets such as stocks, commodities, or bonds and typically trades close to its net asset value (NAV) over the course of the trading day.

ETFs are part of a bigger group of financial instruments known as Exchange Traded Products (ETPs) that is growing in popularity as a method of investing, providing the opportunity for investors to diversify their portfolios while maintaining flexibility in trading that is similar to stocks.

Last year, the Nairobi Securities Exchange (NSE) introduced indices based on those of the London-based Financial Times and Stock Exchange (FTSE), with the aim of establishing exchange- traded funds on the east African bourse.

The NSE said the new indices will lay the foundation for the creation of ETFs and other index-based products and will further attract enhanced foreign investment in the local market.

Muthaura said the new product will mainly target individual investors who would affordably invest in a diverse number of capital market and commodity assets ranging from hard commodities such as commodity ETFs to international equities in the form of international equity ETFs.

"Ultimately, individual investors would have access to segments of the market that were previously inaccessible," he said as the East African nation seeks to diversify its capital markets.

The financial market regulator is seeking to engage a consultant to provide technical assistance in developing the policy and regulatory framework as well as recommendations on market infrastructure requirements for ETFs.

ETFs also enable investors to gain broad exposure to stock markets in different countries and specific sectors with relative ease, on a real-time basis and at a lower cost than many other forms of investment.