Exchange traded funds (ETFs) are one of the newer investment products to surface in the Shariah compliant asset management sector.
Surprisingly, the launch of the first Islamic ETF came not come from the Muslim world but rather from Europe’s leading Islamic financial center – London. iShares, then an arm of Barclays Global Investors, now Black Rock, launched the iShares MSCI World Islamic, the iShares MSCI USA Islamic and the iShares MSCI Emerging Markets Islamic in 2007.
In that same year, six other ETFs were launched including Deutsche Bank’s ETF platform ‘db x-trackers’, AXA Investment Managers’ and BNP Paribas’ joint ‘Easy Etf’ brand, along with offerings from Japan’s Daiwa Asset Management (based in Singapore) and UK-based ETF Securities.
Since then seven other ETFs have been launched globally, all to lukewarm investor reception. Currently the largest ETF in terms of asset under management is Malaysia’s MYETF- DJIM25, managed by i-VCap Management, with RM509.3 million (US$165.92 million) as at the 28th October 2011.
Islamic ETFs are still in their early days according to Mahdzir Othman, CEO of i-VCap, speaking as a panelist at the IFN Issuers & Investors Asia Forum. He said more education was needed for investors to understand the potential of such equity-linked products. This, he contends, can be facilitated by launching more Islamic ETFs in the market.
Asked the reason for the investors’ tepid response towards Islamic ETFs, Mahdzir said that it was probably due to the issue of liquidity, as the ETF units are not highly traded in the secondary market.
The other possibility he highlighted was that the Islamic ETFs were too focused on a particular asset class or theme. “If there were other Islamic ETFs, fund managers [would be] able to allocate their portfolio in accordance to each ETF that is available in the market,” he said.
Mahdzir believes that investors would likely be attracted to a thematic or regional ETF such as a regional dividend yield fund, an infrastructure fund or a commodity/ agriculture based fund.
The other challenge Mahdzir points out is to entice conventional fund managers to diversify their portfolios to include Islamic ETFs. “Again here is where investor education is needed to encourage more institutions, particularly, to be more receptive to Islamic ETFs.
“To a certain extent, I would say Islamic ETFs can be considered as ethical investments and are less risky because in the case of equity for instance, the underlying stocks are in accordance to Shariah; not involved in prohibitive business such as gambling, liquor and tabacco as well as are generally defensive stocks. They are not highly geared because of the screening methodology and you do not have financials as in times of crisis, these are the sectors that can really rock the boat. You can actually see the Shariah compliant ETFs have been quite resilient and over the long term, ETFs have been a performer. Investors have to understand that. The perception that only Shariah compliant funds can invest in Islamic ETFs must be addressed,” he says.
Since the launch of nine Islamic ETFs in 2007, only seven other ETFs have surfaced in the Islamic space. This accounts for less than 3% of total global Islamic mutual funds.
Mahdzir reckons fund managers will launch more Islamic ETFs when investors’ interest picks up. Mahdzir is of the view that Islamic ETFs can be launched during any market condition. “It would be good to launch more in such volatile times, as investors should look to having ETFs in their portfolio because they can better manage their portfolio risk.”
Conventional ETFs have had a head start of more than a decade compared to their Islamic counterparts, with roots tracing back to the US in the 1990s. The asset class has since become extremely popular with investors, particularly in the US and Europe. Although in its infancy, Islamic ETFs can look forward to a very bright future with continuous investor education from regulators and fund managers. — RW