The Gulf may largely be virgin territory to exchange-traded funds – one of the fastest growing financial asset classes – but this might be about to change as bourses encourage regional regulators to overhaul their rule books.
Nearly two decades after they were first launched, ETFs are tentatively being introduced to the region.
ETFs – like an index-tracking mutual fund – strive to mimic the performance of an underlying index, but offer advantages over their more conventional peers.
The funds are listed on an exchange, and can therefore be traded in the middle of the trading day, and, due to the lack of active management, fees are much lower.
This has meant ETFs have soared in popularity since the first vehicle was launched in 1990. Deborah Fuhr of Barclays Global Investors, the world’s biggest ETF manager, estimates that the asset class will cross the $1,000bn mark next year, and climb to $2,000bn by 2012.
“ETFs are a low cost, convenient and efficient access tool,” says Manooj Mistry of Deutsche Bank. “They encourage trading and have positive knock-on effects on the underlying securities.”
This summer, Lyxor, part of Société Générale, the French bank, rolled out an ETF that tracks the Kuwaiti market.
Fellow French lender BNP Paribas this week launched ETFs tracking Dow Jones’ Kuwaiti and United Arab Emirates indices. BNP Paribas’ vehicles only charge a 0.65 per cent management fee, compared with the standard rate of between 1 and 2 per cent of most regional equity funds.
However, the funds will be listed in Europe rather than in local currencies at the local exchanges, due to a lack of appropriate regulation. “For regulatory or technical reasons they aren’t quite ready,” says Danièle Tohmé-Adet, head of ETFs at BNP Paribas Asset Management.
Several regional bourses have identified ETFs as a way to add liquidity and depth to their local markets.
“ETFs are generally less risky than individual equities, they are transparent, very cost-effective, are easy to trade and therefore ideally suited to the dynamics of the [Abu Dhabi stock exchange],” Tom Healy, head of the Abu Dhabi bourse, said on Sunday. “As we diversify our product offering, we hope to attract more institutional investors who have a more long-term approach and can therefore bring more stability to the market.”
Once the regulation is in place to allow local listings, experts expect a flurry of ETFs to come to the region.
In spite of the recent pummelling of local exchanges, economists believe the Gulf will weather the global financial storm better than most. “It’s going to be very ugly for Europe during the next two years . . . while here the fundamentals haven’t really been touched,” says Ms Tohmé-Adet.
Internationally, investors who have exited the market recently are using ETFs to dip their toes back in due to the “cheaper, more diversified access” they offer, says Mr Mistry.
While overall ETF assets under management have declined 4.1 per cent this year, according to Barclays, this is less than the 25.58 per cent drop in the MSCI World index thanks to net inflows into the asset class.
Bankers say ETFs may also offer a good avenue to the biggest investment group in the Gulf – individual retail investors and day traders.
“Retail investors often find mutual funds expensive, and hard to access,” says Elie Ghanem, head of market and product development at the Abu Dhabi exchange. “It will help mature investors and hopefully turn them away from speculation.”
There are still obstacles to overcome for the prospective regional ETF business. Regional exchanges are fairly illiquid relative to more developed bourses – which experts say can hamper the operation of an ETF – and there is a dearth of dedicated market makers.
“It’s still early days,” says Ms Fuhr, but “it’s a good fit for local investors. Local ETFs would be appealing to both local institutional and retail investors.”