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
Says Chelley-Steeley: “Some will perform well in the future and some badly so the advantage that the informed traders have will be cancelled out.” More developed markets had already attempted to parse out ETFs filled only with socially responsible investments.
There are 14 listed ‘green’ or alternative energy based funds. Sharia-compliant financial devices shy away from high debt and business areas that are untenable under Islamic law.
“By avoiding such areas as gaming and alcohol, the results are often similar to those of socially responsible investment funds,” says Brint Frith, the president of Javelin, when the firm first debuted its Sharia compliant fund.
Although the primary advantage of ETFs is that they limit exposure to any one stock, the automated nature of this investment tool can be a double-edged sword, according to William Birdthistle in his study ‘The Fortunes and Foibles of Exchange Traded Funds.’
“The chief limitation of an index-based ETF – no matter how specialized its index may be – is its ironbound connection to the index,” he writes.
Although broad-based ETFs are championed for their diversification, funds that carve up the market into small slices act more as a substitute for a mutual fund manager who could lend advise about which stocks are the best for a particular sector. “The human portfolio manager of a mutual fund operating in the same area could take steps to reduce the mutual fund’s exposure,” Birdthistle writes.
Nizam Hamid, the managing director and head of sales strategy for Blackrock iShares for Europe, the Middle East, and Africa, says there was a significant amount of interest in this form of investing at the Union of Arab Stock Exchanges conference that took place in Egypt late last year.
“The exchanges could see the success that we’ve had with ETFs both in the American markets, parts of Asia, and across Europe and they want to understand how that can help them drive trading volumes and liquidity on their exchanges,” he said.