Islamic indices provide market participants with a comprehensive set of Shariah compliant benchmarks for equities and Sukuk, covering a wide variety of investment themes and strategies. These have been created to support the investment needs of the Islamic investment community and have gained considerable traction over the past years.
Review of 2022
Landscape of Islamic funds
Shariah compliant investment strategies have been offered for many years in an actively managed mutual fund wrapper, with predominance in traditional Islamic markets such as Malaysia and Saudi Arabia. However, index investing has made significant inroads in this category over the past five years. For example, more than one-half of currently available Islamic index funds were launched after 2017. Also, Islamic index funds, unlike their actively managed counterparts, are now available to most investors around the world — in North America, Europe and other Islamic markets in the MENA and Asia Pacific regions.
As of the 30th September 2022, there were over US$4.7 billion in assets tracking Shariah compliant indices in mutual funds and exchange-traded funds (ETFs). This represents an increase of US$425 million year-on-year and US$ 3.4 billion since 2017. While it is still a relatively small asset base compared with other major categories, this segment ranks among the fastest-growing, with an annualized growth of 30% since 2017. Islamic ETFs have been a key part of this trend, with a general proliferation of new products across investment themes and listing regions.
Growth of Islamic ETFs
This year has been exceptional for Islamic ETFs; there were US$1.5 billion-worth of assets under management (AuM) tracking Shariah compliant indices as of the 30th September 2022, representing 13% growth year-to-date, despite difficult market conditions. Islamic ETF AuM have been supported by the launch of eight new ETFs this year, along with all-time-high inflows of more than US$500 million.
These recent launches have raised the total number of Islamic ETFs to 24, covering a wide set of investment exposures from global, regional and country-specific cores to more specialized investment themes such as factors and real estate.
Another notable aspect of this growth is that demand seems to be global, as Islamic ETFs have become more readily available to investors outside of the MENA and Asia Pacific regions and have extended into North America and Europe.
Preview of 2023
Trends in Islamic index investing
Trends in Islamic indexing tend to mirror what is happening in the broader market. A push toward ESG and climate indices continues to be a major theme around the world. This year, S&P Dow Jones Indices launched Shariah compliant versions of major headline ESG indices such as the S&P 500® ESG Shariah Index, S&P Europe 350® ESG Shariah Index and S&P Pan Arab Composite ESG Shariah Index, among others.
The combination of ESG and Islamic finance principles in an index framework ensures applicable quantitative and qualitative screens are applied to identify and exclude companies violating specific ESG and Shariah compliance criteria. This approach seeks to more adequately satisfy investors looking to combine ESG and Shariah benchmarks.
Demand for more ESG versions of Shariah indices is likely to continue, particularly for indices that can be used to underlie tradeable products, following a broad market trend toward the issuance of more ESG and climate-aligned investment products.
Moreover, there has been a surge in listed funds for core and factor indices that cater to local market participants, particularly in GCC countries and Malaysia. As the local product ecosystem continues to grow, the interest of investors for more products with different exposures is likely to grow as well. Some of these exposures are not currently available offshore but can be found locally (eg ETFs tracking Shariah compliant indices with exposure to Saudi Arabia, Kuwait, the UAE, Turkey, China, etc).
Conclusion
Islamic indexing continues to experience accelerated growth in assets and product issuance, despite recent market volatility. Increased availability of new exposures across markets and education on the benefits of indexing could help sustain this trend in the near term. Also, as we experience greater adoption of more sustainability-focused investments, strategies combining ESG and Shariah may become one of the key drivers of growth in Islamic investments.
Eduardo Olazabal is a senior analyst at S&P Dow Jones Indices. He can be contacted at [email protected].