Islamic indices provide market participants with a comprehensive set of benchmarks covering equities and Sukuk, as well as a wide variety of investment themes and strategies. These solutions encompass the diverse benchmarking needs of the Islamic investment community and have continued to gain adoption in today’s economic environment.
Review of 2020
Global Shariah compliant equity benchmarks performed positively through the 30th October 2020 — gaining 10.4% — as measured by the S&P Global BMI Shariah, even amid the devastating economic effects of the global coronavirus pandemic. As shown in Table 1, Islamic indices enjoyed record outperformances vs. conventional counterparts in 2020. The double-digit outperformance, while illustrative of the continued growth of technology-oriented companies and the near absence of an underperforming finance sector, has now held for some years. This backdrop of historically rising and outperforming Shariah equities may serve as a tailwind for continued development of Shariah-compliant equity solutions.
Table 1: Comparative returns (year-to-date (YTD) through the 30th October 2020) |
|||
Benchmark |
Shariah (%) |
Conventional (%) |
Variance (%) |
10.4 |
-1.4 |
11.8 |
|
DJIM World Index |
11.4 |
-1.4 |
12.8 |
8.9 |
2.8 |
6.1 |
|
Source: S&P Dow Jones Indices. Data as of the 30th October 2020. Index performance based on total returns in the US dollar. Past performance is no guarantee of future results. Table is provided for illustrative purposes. |
The emergence of Islamic ETFs in the US
One area of renewed interest lies in North America, where just 18 months ago, only a handful of active asset managers offered robust Shariah services and US listed exchange-traded funds (ETFs) were still not available. Following the recent launch of three new US listed ETFs representing Shariah compliant US equity and global Sukuk, these funds now represent approximately US$110 million in assets (see Table 2). Index-based product availability has increased and usage, while still very small, is growing in the region.
Table 2: US listed Islamic ETF growth YTD |
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ETF |
Inception date |
AuM (US$ million) 30th December 2019 |
AuM (US$ million) 30th October 2020 |
30th December 2019 |
19.9 |
29.9 |
|
18th December 2019 |
23.6 |
30.2 |
|
15th July 2019 |
26.5 |
49.7 |
|
Total |
– |
69.9 |
109.8 |
Source: FactSet. Data as of the 30th October 2020. Table is provided for illustrative purposes. |
Broad-based sustainability push
Increased interest in values-based, sustainable investing beyond Shariah-specific requirements has likewise exemplified robust growth. ETF products based on the S&P 500 ESG, designed to measure the performance of securities meeting sustainability criteria, while maintaining similar overall industry group weights as the S&P 500, now account for approximately US$1.6 billion, a threefold increase this year alone, indicating broader adoption of values-based investing. Financial advisors, charged with offering the best solutions for their clients, are looking for turnkey solutions to service Muslim investors. Significant progress has been made in the last year, and we suspect that demand still remains unsatiated.
Preview of 2021
In our SPIVA (S&P Indices Versus Active Funds) reports, our colleagues demonstrate that through the first half of 2020, 77.97% of US large-cap funds underperformed the S&P 500, while in India 80.43% of Indian large-cap funds underperformed the S&P BSE 100. These and other studies across geographies serve to demonstrate the benefits of lower-cost passive index solutions that have historically outpaced the performance of active managers. Continued awareness of the viability of such offerings will serve to benefit Islamic investors.
Continued growth of passive
Passive ETFs have been the fastest-growing financial instrument in the last decade, far outstripping the growth rate of active mutual funds. Total ETF assets under management (AuM) increased by US$600 million this year alone (figures through the third quarter), surging past US$6.8 trillion of AuM globally. In comparison, while Islamic ETF AuM continue to grow, total assets stand at approximately US$530 million.
Diversified product sets
The further adoption of such products may lie in the development of additional strategies and asset classes to compete more directly with active strategies. Other asset classes, such as REITs, may also aid. Multifactor strategies, such as the recently launched DJIM Developed Markets Quality & Low Volatility Index, may help to fill gaps to compete more directly with active strategies. This index, for example, measures the performance of developed market Islamic stocks, and targets companies with the highest combination of quality and low volatility multifactor scores, and subsequently weights the components so that the least volatile companies receive the highest weights.
Fiduciary practice
One manner for index solutions to really take off in many key Muslim-majority markets is a greater emphasis on education. Active management is deeply entrenched both culturally and within the incentive structures of some regional financial industries. Financial advisors need to adopt fiduciary models and a greater awareness of the benefits of reduced investment costs via passive products in order to drive adoption in these markets.
Conclusion
Global Islamic indices have continued to outperform conventional counterparts well into 2020 and these robust gains may serve to further promote their adoption. Increased awareness and availability of passive ETF products are likely to drive continued asset flows into this segment. Further developments, including additional product offerings and a shift toward greater fiduciary standards, would lend further benefits.
Past performance is not an indication or guarantee of future results. Please see the Performance Disclosure for more information regarding the inherent limitations associated with back-tested and/or hypothetical performance. It is not possible to invest directly in an index. Exposure to an asset class represented by an index may be available through investable instruments offered by third parties that are based on that index. S&P Dow Jones Indices does not sponsor, endorse, sell, promote or manage any investment fund or other investment product or vehicle that seeks to provide an investment return based on the performance of any Index. S&P Dow Jones Indices is not an investment or tax advisor. S&P Dow Jones Indices makes no representation regarding the advisability of investing in any such investment fund or other investment product or vehicle.
John Welling is the director of equity indices at S&P Dow Jones Indices (S&P DJI). He can be contacted at [email protected].