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11 December 2023

Middle East wakes up to exchange traded funds

Abu Dhabi and Bahrain bourses are planning to introduce ETFs soon. (IMAD ALAEDDIN)

By Shashank Shekhar

There is a growing awareness for Exchange Traded Funds (ETFs) in the Middle East and the region's exchanges are waking up to the idea of launching them here, a top official of Barclays Global Investors said.

"Many of the exchanges in the GCC have talked about introducing an ETF. I have moved around the region and have discussed the issue. Some of the investors here, including the private banks, are telling us that the only products they are using now are ETFs," says Deborah Fuhr, Managing Director and global head of implementation strategy with Barclays Global Investors (BGI).

However, the region does not have an ETF now. And investors wanting to trade in it need to register in foreign waters. Fuhr said that countries need to put in essential regulations in place in their stock markets and establish essential benchmarks prior to launching ETFs.

"They also need a good asset allocation manager."

An ETF is an investment vehicle traded on stock exchanges, apparently very much like stocks.

An ETF holds assets such as stocks or bonds and trades at almost the same price as the net asset value of its underlying assets over the course of the trading day.

ETFs track an index, such as the Dow Jones Industrial Average such as the S&P 500. Allocating assets to ETFs is not a one off decision as being an open ended fund, it needs to be visited regularly. Fuhr said that the fund hold a higher ground as compared to their other counterparts on platforms such as transparency and ability to trade with multiple counterparties. Fuhr's recent tour in the region took her to countries like Kuwait, Saudi Arabia, Bahrain and the UAE.

"Egypt is the only country that has already provided a licence to launch an ETF. There are other countries waiting for the right time. And the time is not right now considering the prevailing crisis," she said.

Egypt would be the first country in the Middle East to launch an ETF with its investment bank Belton planning to launch it this year.

Abu Dhabi Securities Exchange and Bahrain Stock Exchange are two exchanges that are planning to introduce ETFs soon. Investors in the GCC are currently using ETFs in the US and Europe, Fuhr said. "Index is a benchmark that people understand. And these products are cost efficient."

A study conducted by Fuhr showed that at the end of 2008, the global ETF industry had 1590 ETFs with 2,658 listings, assets of $711 billion (Dh2.6 trillion) from 85 providers and 42 exchanges around the world.

The growth is phenomenal considering there were just 21 ETFs in the world in 1997.

"Just about the only product to see net inflows in 2008 were ETFs. On a global basis ETF net sales were $187.5bn," Fuhr said

In 2008, the number of ETFs increased by 36 per cent with 472 new ETFs launched. While most of the ETFs launched so far have been successful, those with not very sound business models have failed. "For an instance, an ETF called 'Suppliers to Walmart' failed."

"ETFs of blue-chip companies have been successful. This year ETFs comprising of stocks of infrastructure, clean energy and bio-technology companies may fare well considering these are the spheres that the Obama administration will be focusing on," Fuhr said.