Islamic exchange traded funds poised for growth as interest grows

News - Funds

Written by Ray Clancy

Monday, 13 September 2010 09:13

There is huge room for growth in Islamic exchange traded funds with around 1.6 billion Muslims worldwide and $950 billion in assets under the management of the Islamic finance industry, it is claimed.

There are now Sharia-compliant ETFs trading on major stock exchanges around the globe, including Saudi Arabia, Europe, the US and Asia and currently 16 ETFs trading that are benchmarked to Islamic indices, with around $36 million in total assets across the funds, says iShares vice president Robert Broadwell.

‘Sharia compliant indices now offer investors the ability to gauge equity market returns based on a screening and selection process that combines benchmark index design with Islamic principles,’ he explained.

‘The key element that unifies the various Islamic index providers is transparency. The security selection rules and screening methodology are clearly laid out and published on each provider’s website. The evolution of rules based indices that are acceptable to a broad constituency of Islamic investors has also led to the development of suitable investment products,’ added Broadwell.

He also believes that the availability of these indices has also allowed for the introduction of cost efficient products such as ETFs, with well defined exposures and high levels of transparency, to enter the market.

The first Sharia compliant ETF was launched in January 2007 based on a large cap global index from Dow Jones. Since then, other ETF providers have entered the market.

Since the first Sharia compliant fund, iShares, a leading provider of ETFs, has also introduced Sharia compliant ETFs that are all currently based on holding physical equities.

‘The iShares ETFs offered a number of firsts. They were the first to be based on broad based global emerging benchmark indices and were the first to offer Sharia compliant exposure to MSCI World (Developed Markets) and MSCI US Islamic markets,’ said Broadwell.

‘This meant that for the first time, Islamic investors could access broad emerging market equity and US specific exposure through ETFs. On exchange volumes are increasing for the three Sharia compliant iShares. For the January to June 2010 period, total traded volumes in these three funds was over $90 million, which compares to $54 million in the same time period in 2009,’ he revealed.

‘From a Gulf perspective, we have seen interest in Sharia compliant ETFs by Islamic banks in their asset management, treasury and wealth management departments,’ he added.

‘Private clients’ advisers in conventional banks also report including Sharia compliant ETFs in client portfolios in combinations with actively managed funds and structured products, according to Broadwell.

‘Most Islamic finance professionals in the Gulf would agree that is still early days for the Islamic asset management industry but we are optimistic that Sharia compliant ETFs will become a familiar tool amongst practitioners of professional asset and wealth management that is keeping with the foundations of Sharia,’ he said.