US: Exchange-traded funds (ETFs) may have been at the fringe of the Islamic finance industry, but the asset class has gained serious momentum in recent years, with new launches particularly from non-Muslim-majority nations. US-based Saturna Capital is the latest to enter this space with its Shariah compliant ethical ETF.
The launch of the Saturna Al-Kawthar Global Focused Equity UCITS ETF (AMAL) follows hot on the heels of Russian banking giant Sberbank’s debut Islamic ETF earlier this week. The entry of these new ETFs is a positive signal for the Islamic ETF universe in comparison with the global industry but it is a drop in the ocean. Globally, US$1 trillion was invested into ETFs and exchange-traded products (ETPs) in the first 10 months of the year, a record number, according to research firm ETFGI.
Islamic ETFs have generally been concentrated in Muslim jurisdictions such as Malaysia which has six Islamic ETFs to its name and Iran which has at least 28 Shariah ETFs, although the US is also a notable participant with funds from the likes of BlackRock and Fidelity.
Nonetheless, the Muslim world is increasingly embracing this asset class as evident by new ETFs entering the market: in the last 12 months, the industry welcomed ETFs by US-based SP Funds, UK-based Almalia and Saudi-based Albilad Capital, among others.
A veteran in the Islamic asset management space with over three decades of experience, Saturna Capital’s first Islamic ETF, launched in partnership with HANetf, is notable for two reasons: it is an actively managed ETF, and it also complies with environmental, social and governance (ESG) principles.
“Active ETFs are the next frontier for the European ETF market. Regulators have played a major role in the rise of active ETFs in the US and what happens in the US tends to follow here. Typically, the US is two to three years ahead in AuM [assets under management] growth and product innovation. If this is the case, then it’s only a matter of time before active ETFs become commonplace in Europe. Over the last two years, active ETFs have gone from nowhere to being the main battleground for providers in the US and we expect that to follow suit to Europe,” shared Hector McNeil, co-CEO of HANetf.
ETFGI estimates assets and net inflows in active ETFs worldwide were US$418 billion and US$110 billion respectively at the end of September 2021. During September, actively managed ETFs and ETPs saw net inflows of US$14.68 billion, bringing year-to-date net inflows to US$109.93 billion AMAL follows the launch of the Saturna Sustainable ESG Equity HANzero UCITS ETF earlier this year.
“Saturna Capital believes including ESG factors in an Islamic portfolio further reduces risk, leading to more resilient portfolios and that companies proactively managing business risks related to ESG issues are more resilient and make better contributions to portfolios designed for patient investors,” said Scott Klimo, the firm’s chief investment officer.
AMAL will follow a similar investment philosophy and approach as the US-registered Amana Growth, Amana Income and Amana Developing World funds, which also incorporate Islamic and ESG guidelines. These funds were launched in 1989, 1994 and 2009 respectively.