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 Emily Meredith
At the end of 2009, the Bahrain Financial Exchange announced a clearing and depository body so multi-asset products can be traded and cleared on the market. Called the BFX Clearing and Depository Corporation, exchange officials say that the body will be established early this year and make it possible for ETFs to be traded on the market.
This is not the first time representatives from the region’s markets have talked about the funds making a debut. In 2008, officials from the Abu Dhabi Exchange said it could list ETFs by the end of the year, but it still does not have any. The Securities and Commodities Authority needs to initiate regulations before markets can list them.
Jordan’s Amman Stock Exchange could also have them listed soon, according to the head of listings at the exchange, Moayyad Hamid. But he said the exchange must resolve technical issues and Jordan needs to develop regulations before any can debut.
Even when those technical measures are in place, the relatively small sizes of the markets here could present problems. “Smaller markets do make it harder to replicate the underlying shares within the ETF, as liquidity is needed to ensure success of trading,” says Barclays Wealth Management’s Jafree.
ETFs have come a long way over the past 20 years. The first incarnation of exchange traded funds was the Index Participation Fund, which mirrored the S&P 500 and was traded on the American Stock Exchange in 1989. It was short lived, but over the past two decades these funds have proliferated and they now cover more customized areas of the market.
“There are lots of reasons that ETFs are positive,” says Patricia Chelley-Steeley, the director of the Aston Center for Research in Experimental Finance at Britain’s Aston University. “It’s a way to hold a diversified portfolio instead of having to invest in a range of securities and the costs are very low.” Chelley-Steeley said that ETFs can also help even out the effects of trading carried out by people with extra information so that armchair investors are not exploited by people who have extra information about the markets. In January, the $1.7 billion takeover of Dubai-based construction company Arabtec by Abu Dhabi investment company Aabar generated controversy after a 33 percent rise in share price in the two weeks before the deal. Officials began investigating whether there had been any insider information leaked.
Data studied by Chelley-Steeley and her colleagues show that investors who hold ETFs are less likely to be exploited in situations such as Arabtec.