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Plus ça exchange

Plus ça exchange

The democratization of investment in the form of exchange traded funds is arriving in the Middle East. Can they change the investment landscape?

February 21, 2010 4:31 by

Remember the tale about Joseph Kennedy – father of the former American president – when he was a banker on Wall Street in the 1920s? He decided to exit the market when he began getting stock tips from his shoeshine boy.

Kennedy was convinced there were too many people dabbling where they didn’t belong – the stock market. Whether it was 1929 or today, speculative buying and selling creates the kind of inflated securities prices that drive market pros like old Joe running for cover.

The Arab world is now privy to a modern day creation for the investing Everyman: exchange traded funds. These baskets of stocks are enormously popular in western markets but are only now gaining traction in the Middle East. Their appeal is based on giving an investor exposure to a wide swath of the market without the fees inherent in mutual funds – and without having to listen to amateur prognosticators like shoeshine boys.

The company Blackrock iShares has been active in promoting ETFs in this region, visiting regional events and the annual conference of the Union of Arab Stock Exchanges to plead their case. Locally listed ETFs also could provide residents with a more holistic view of the market. Foreign ownership laws mean that the foreign-listed ETFs may not include all of the stocks listed on the local exchanges. “All the shares in Etisalat that foreigners can buy, they have been bought,” says Robert Broadwell, the regional business director for Blackrock iShares.

If ETFs are listed locally within the next year, they could be meeting an already existing demand.

“In the Gulf, we haven’t been here for years, but our customers have been here for years,” he says.

Their emergence in the Gulf echoes an appetite from international investors for exposure to the region. Lyxor’s ETF Kuwait debuted in 2008 and trades on the London Stock Exchange. First Israel Fund and iShares both have products indexed against the Israeli market and the Turkish Investment Fund and iShares’ funds follow the Turkish market.

Khurram Jafree, the director of the investment and produce office at Barclays wealth management, says that ETFs are playing a greater role in portfolios of clients from across the entire wealth spectrum.

“An investor can use ETFs to form core parts to outperform the market or as tools to gain exposure quickly to a market while deciding which active manager to use.” Currently the company offers a few instruments to cater to local markets, such as Sharia-compliant ETFs, but they must offer them on foreign markets. IShares is not the only firm to offer Sharia compliance on the international markets. In the middle of last year, New Jersey-based Javelin Investment Management announced it would offer an ETF based on the Dow Jones Islamic Market Titans 100.

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