You may remember the De Lijn commercial from 2012 which had the slogan “It is smarter to travel in groups”, a slogan people hardly followed in 2020 amid the pandemic, although investors in the financial markets have embraced it tightly since. They trust exchange-traded funds (ETFs), and they invest together.
According to a well-explained definition from Bursa Malaysia, an ETF is an innovative financial product that exhibits the best of open-ended funds and listed stock features. It allows investors to benefit from diversification, a transparent portfolio, buying and selling flexibility, low fees and tax efficiency.
Review of 2020
On the 16th January 2020, ETFGI, an independent research and consultancy firm covering trends in the global ETF and exchange-traded product (ETP) ecosystem, said a new decade has started with a record US$6.35 trillion. And, at the end of October 2020, assets invested in 6,970 ETFs and ETPs listed globally (including Shariah compliant ETFs) reached US$6.81 trillion, a very astonishing performance record of net inflows for these collective investment vehicles during the pandemic.
It goes without saying environmental issues were the main issues in 2020. Eventually, the number of investors who showed interest in socially responsible impact investing funds and environmental, social and governance (ESG) funds was growing. These portfolios initiated a new family of ETFs that focus on investing criteria for the social good.
In the CFA Institute and United Nations-supported Principles for Responsible Investment (PRI) 2019 report (‘ESG integration and Islamic finance: Complementary investment approaches’), it was stated that Islamic finance and ESG investing are complementary capital-raising and investment approaches with many shared principles.
In the same context, Tariq Dennison, a Hong Kong-based wealth manager and a lecturer at ESSEC Business School, beautifully said: “Shariah law can be thought of as a centuries-old ESG framework.”
Nevertheless, the concept was universally accepted though Shariah compliant ETFs are considered a subsidiary of ESG products today. Also. Islamic ETFs (i-ETFs) usually receive very good ratings from the ESG Fund Rating.
The ESG Fund Rating measures the resiliency of portfolios to long-term risks and opportunities arising from ESG factors, ranging from best (‘AAA’) to worst (‘CCC’). Highly rated funds consist of companies which may be more resilient to disruptions arising from ESG events (etf.com).
Nowadays, a good number of Shariah compliant indices provided by FTSE, MSCI, S&P, etc, are available to be tracked by i-ETFs in passively managed forms. There are also active i-ETFs mostly offered in Iran, where the investment managers build an investment strategy by buying and selling a range of Shariah compliant financial products including commodities, equities, Sukuk, derivatives and such. Another example of an active i-ETF as reported by Financial Times in late September of 2020 was the Almalia Sanlam Active Shariah Global Equity UCITS ETF which has started trading in London. This fund invests in companies with low leverage, ethical practices and good governance; its recent assets under management (AuM) were reported to be worth EUR7 million (US$8.3 million).
The US market hosted its first i-ETF, the Wahed FTSE Shariah ETF (HLAL) in July 2019. By the 23rd November, HLAL had US$56.51 million-worth of AuM and an MSCI ESG Fund Rating of ‘A’. HLAL outperformed the market with an annual net asset value growth of 22.75% as reported by etf.com.
In January 2020, NASDAQ announced its newly Shariah compliant equity and fixed income ETF, the SP Funds S&P 500 Shariah Industry Exclusions ETF (SPUS) with an MSCI ESG Fund Rating of ‘AA’ based on a score of 7.52 out of 10. SPUS recorded AuM worth US$35.38 million.
Hence, a comparison between globally reputed i-ETFs and their conventional competitors with billions of AuM shows the young industry still has a lot of room to grow.
Preview of 2021
The investment circle is paying more and more attention to profitable socially responsible investments, and the market appetite and eagerness for Shariah compliant ETFs are expected to increase. In addition, despite the unpredictable future of climate issues, technology firms are expected to maintain their outstanding performance in 2021. Accordingly, based on the Shariah indices history of tracking tech firms, it takes us to this conclusion that i-ETFs will maintain efficiency in 2021 and absorb more investors. Indeed, it has been reported that many asset management firms are now launching or planning to launch i-ETFs.
S&P Dow Jones Indices reported that Shariah compliant benchmarks significantly outperformed conventional indices, gaining an advantage of 13.3% and 14.4% year-to-date. It noted that Shariah indices tend to be overweight in information technology stocks and avoid financials, an effective strategy in the COVID-19 situation. Hence, i-ETFs have proved to be successful in every aspect.
Challenges will always persist but the sector is maturing. Hopefully, in the coming year, these socially responsible products will attract not only investors from Muslim communities but also all investors from around the globe who are interested in ESG products.