Friday 29 Mar 2024
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(Oct 21): Almost a decade since the Islamic world’s first exchange-traded fund started operating, assets account for less than one percent of the total $2.3 trillion ETF market, according to Falah Capital LLC.

The U.S. fund manager set up its inaugural Shariah- compliant ETF this month as it seeks to tap growth in Islamic banking assets. Investment products conforming to Koranic principles that pool mainly stocks, bonds or commodities into single share units amount to $11.6 billion, Thom Polson, chief executive officer at Seattle-based Falah Capital, said in an Oct. 18 e-mail.

“The absence of such a major investment vehicle is surely a deficiency for Islamic investors,” Resat Karabiyik, managing director at Istanbul-based Bizim Menkul Degerler AS, which pioneered Shariah-type ETFs in 2006, said in an Oct. 17 e-mail. “Since their first inception, ETFs have become one of the major globally accepted investment vehicles that suit both institutional and individual investors.”

While the Philippines is set to become the latest nation to start an index of Shariah-compliant stocks this year, a lack of investment options in equities and bonds that comply with religious tenets is hindering growth in ETFs, Falah Capital’s Polson said. Ernst & Young LLP forecasts worldwide Islamic banking assets will double to $3.4 trillion by 2018.

Tracking Equities

Exchange-traded funds are index-based investment products. There are 27 Islamic ETFs worldwide and about 97 percent of their assets are invested in precious metals while the rest track equity indexes, Polson said.

The Falah Russell-Ideal Ratings U.S. Large Cap exchange- traded fund has a market capitalization of $2.4 million and covers American companies that have been screened to ensure they adhere to Koranic principles. It seeks to replicate the Russell- IdealRatings Islamic U.S. Large Cap Index, which has gained 5.2 percent this year.

The Dow Jones Islamic Market World Index of shares has fallen 0.5 percent in 2014, compared with last year’s 19.2 percent advance. The gauge has a market capitalization of $18 trillion, exceeding the $4.7 trillion in the Dow Jones Industrial Average, which is down 1.1 percent this year.

Shariah law forbids investment in shares of companies involved in activities deemed as unethical such as gambling, prostitution, and alcohol or pork-related businesses. Islamic finance also prohibits the payment of interest and promotes risk-sharing.

‘Most Feasible’

Islamic ETFs would help develop the Shariah-compliant finance industry, said Karabiyik at Bizim Menkul Degerler, which started the BMD Dow Jones DJIM Turkiye exchange-traded fund in 2006. It returned 0.9 percent this year, compared with the 12.6 percent gain in the Borsa Istanbul 100 index of shares.

“For basic asset allocation among equities, fixed income or commodities, ETFs are the most feasible solution,” Karabiyik said. “For individual investors, ETFs are almost the only way to invest and create asset-allocation models like professionals.”

Growth in the Islamic bond market is outpacing exchange- traded funds. Global sales of sukuk, which pay returns from an underlying asset such as property, have increased more than sixfold in the last 10 years to about $37 billion in 2014, data compiled by Bloomberg show. That’s equivalent to about 2 percent of the $1.7 trillion in Shariah-compliant banking assets.

Top Performer

Malaysia, home to the world’s largest sukuk market, has two Islamic ETFs with a market value of 320 million ringgit ($98.8 million), taking the nation’s total to six worth 1.03 billion ringgit, according to data on the Securities Commission’s website.

The iShares MSCI Emerging Markets Islamic UCITS ETF is the best-performing fund in the last three months, delivering a 10 percent return, according to data compiled by Bloomberg. The iShares MSCI USA Islamic UCITS ETF is second at 9 percent.

MyETF Dow Jones Islamic Market Malaysia Titans 25, the first Asian Islamic ETF, was started in January 2008. It tracks the Dow Jones Islamic Market Malaysia Titans 25 Index and has fallen 3.3 percent since July 17.

“The main driver for growth of Islamic ETFs in the global market would be the increasing market awareness and the rising demand for alternative asset classes in the Islamic finance industry,” Abas A. Jalil, chief executive officer at Kuala Lumpur-based consultant Amanah Capital Group Ltd., said in an e- mail yesterday. “Islamic ETFs can provide diversity in terms of risk, returns and market coverage for investors to diversify their Shariah-compliant portfolios.”

 

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