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Regional ETFs see assets at USD172m at the end of 3Q-2011

By Sarah El Jamal, Research Analyst, Zawya
By the end of September 2011, the value of assets under management of Middle East and North Africa's exchange-traded funds, or ETFs, reached approximately USD 172 million, according to Zawya data.

A new research report by Zawya, MENA ETF Landscape, shows that the 10 ETFs studied in the review are at least 50% invested in the MENA region, regardless of their country of listing.

An exchange-traded fund is a security that tracks an index, commodity or a basket of assets like an index fund; however, it is traded like a stock on an exchange market. Because they are traded like stocks, ETFs experience price changes throughout the day as they are bought and sold at market price during the trading day. ETFs possess characteristics that make them attractive as alternatives to individual stocks or the common mutual fund. The key characteristics of an ETF are transparency, ease of access by investors, cost-efficiency, trading flexibility, and passive management.

MENA ETF Landscape is a review of the nascent ETF industry in the MENA region. It has been inspired by the recent and unprecedented launch of the first regionally listed ETFs, which sparked interest in the region's ETF industry.

The first regionally listed ETFs were launched in March 2010: the Falcom Saudi Equity ETF and the NBAD OneShare Dow Jones UAE 25 ETF. This was a financial landmark for the MENA as it was a much-anticipated move that has been planned and postponed for several years now.

The ETFs studied in the review amount to ten and are at least 50% invested in the MENA region, regardless of their country of listing. The international providers are Invesco PowerShares, Lyxor Asset Management, Van Eck Global, Wisdom Tree, and BlackRock Asset Management Ireland Limited. Regionally, the providers have been limited to Falcom Financial Services and the National Bank of Abu Dhabi so far.

Notably, most of these ETFs have been launched in late 2008 or early 2009, in the wake of the global financial crisis, signifying international asset managers' faith in the MENA region. All of them are invested in equities, and most have recorded significant improvement in performance from 2009 to 2010, indicating some recovery from the financial crisis, only to plummet again in 2011 on account of the economic downturn of the Arab Spring. Nevertheless, many plans for further MENA ETF launches have been announced, indicating unshakable confidence in the region.

The report also includes interviews with ETF managers. Alan Durrant, Group Chief Investment Officer and General Manager at the NBAD Asset Management Group, elaborates on the NBAD OneShare Dow Jones UAE 25 ETF in terms of investment strategy. "The ETF reflects the biggest sectors in the UAE stock market and economy: banking, property and telecoms. We chose these sectors alongside our index partner Dow Jones to give investors exposure to the largest and most liquid stocks in the UAE markets," said Durrant.

As of August 2011, the NBAD OneShare Dow Jones UAE 25 ETF was invested 36% in banks, 18.65% in real estate, and 10.79% in the telecom sector.

Durrant also commented on investor appetite: "Appetite is low. We are seeing a few bargain hunters but investors in general are paralyzed by uncertainty at the moment. However, there are plenty of reasons to remain positive. The UAE is performing well as an economy, equities are good value and we have the prospect of a potential MSCI upgrade to come later in the year."

Saleh Al-Henaki, Head of Asset Management at Falcom Financial Services, sheds light on the Falcom Saudi Equity ETF and the Falcom Petrochemical ETF and discusses future plans to launch an ETF in Oman.

"Only ETFs are open for foreigners' direct investment in Saudi equity market; so it is a new thing for them. We have seen quite an interest by foreign institutions; however, the global investment and economic situation has not been in our favor," said Al-Henaki.

By allowing expatriate workers and nonresident foreigners to invest directly in Saudi stocks, the ETFs have contributed to liberalizing the Saudi stock market and opening it up for foreign investment. So far, approximately 15% of the ETF investors are foreign.

A big concern of investors in MENA ETFs is the risk arising from geo-politics, equities, passive management, and low correlation with the index. The annualized standard deviation, a common volatility indicator, of the MENA ETFs ranges from 15.97% to 34.9% as of September 2011. Meanwhile, comparing the ten MENA ETFs' total expense ratios (TER) show that they are generally less expensive than MENA mutual funds. The TERs range from 0.65% to 1%, with the regionally listed ETFs being the most expensive.

Read the full report here.

© Zawya 2011