ISLAMIC

CAPITAL MARKET

Islamic-Exchange Traded Funds

(I-ETF)

Mahyuddin Khalid
Topic Outline

Exchange Traded
Content
Funds (ETF)
Features of ETF
Nature of ETF with
Respect to Stocks
and Unit Trusts
Islamic Exchange
Traded Funds (I-ETF)
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Exchange Traded Funds (ETF)

Exchange Traded Funds (ETF) can be defined as

A listed index-tracking fund

Structured as a unit trust scheme

Whose primary objective is to achieve the same return as a particular market index

By investing all (full replication) or substantially all (strategic sampling) of its assets

In the constituent securities of the index.

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Features of ETF

An ETF is listed Most ETFs are passively Malaysia’s first

•Its units can be bought and sold anytime managed index funds Syariah-compliant ETF,
during stock exchange •Managers do not pick stocks MyETF- Dow Jones
trading hours. based on fundamental analysis. Islamic Market Malaysia
•Instead, managers track the Titans 25
performance of a benchmark (myETF-DJIM25) trades
Investors buy and sell ETF index.
on Bursa Malaysia and
units through An ETF is an index
tracks the Dow Jones
stockbrokers rather than tracking fund.
Islamic Market Malaysia
unit trust agents.
Titans 25 Index. This
indicates that
MyETF-DJIM25 holds
shares of the 25 leading
syariah-compliant listed
companies in the country.

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Features of ETF

Most ETFs are

An ETF is listed passively managed
Investors buy and sell An ETF is an index Malaysia’s first
index funds
ETF units through tracking fund. Syariah-compliant
stockbrokers rather ETF, MyETF- Dow
than unit trust Jones Islamic Market
agents. Managers do not pick stocks Malaysia Titans 25
based on fundamental analysis. (myETF-DJIM25)
Instead, managers track the trades on Bursa
performance of a benchmark Malaysia and tracks
index.
the Dow Jones Islamic
Market Malaysia
Titans 25 Index.This
indicates that
Its units can be MyETF-DJIM25 holds
shares of the 25
bought and sold leading
anytime during syariah-compliant
listed companies in
stock exchange the country.
trading hours.
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Features of ETF

An ETF is listed
Its units can be bought and sold anytime during An ETF is an index tracking fund
stock exchange trading hours.

Most ETFs are passively managed index funds

Managers do not pick stocks based on
Investors buy and sell ETF units through
fundamental analysis.
stockbrokers rather than unit trust agents
Instead, managers track the performance of a
benchmark index.

Malaysia’s first Syariah-compliant ETF, MyETF- Dow Jones Islamic Market Malaysia Titans
25 (myETF-DJIM25) trades on Bursa Malaysia and tracks the Dow Jones Islamic Market
Malaysia Titans 25 Index. This indicates that MyETF-DJIM25 holds shares of the 25
leading syariah-compliant listed companies in the country – BURSA MALAYSIA
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Understanding Exchange Traded Funds (ETFs)

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The Operation of Islamic ETF
Diagram 1 : Basic Structure of an Islamic ETF

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Nature of ETF with Respect to Stocks and Unit Trusts

ETF on the other hand resembles the feature of a unit trust.

• E.g.; An investor purchases 1 unit of the unit trust. It is as good as holding
the various stocks on the Exchange/Bursa.
• Likewise when an investor purchases 1 unit, it is as if the investor is holding
several top stocks.

In addition, unit trust involves active

management where the fund managers
pick the stocks that will generate a
higher return than the market return.
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Comparison of Investment Fund

ETFS Stocks Unit Trusts

Nature Units that represent Shares Units that represent
basket of stocks underlying basket of
stocks

Traded on Exchange Yes Yes No

Fund Information Market price and Market price and Information available
trading activity data trading activity data from fund manager
readily available readily available and fund’s appointed
agents

Diversification Yes Yes Yes

Traded through Yes Yes No (via Agent)
Broker
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Advantages of ETF

Diversification Lower expense ratio Lower transaction cost

• Similar to index funds, • As a passively managed • ETF units are bought

ETFs provide investors fund, ETF incurs lower and sold at the same
with similar management fee and transaction cost as
diversification benefits lower transaction costs those charged for
derived from holding as compared to an trading shares on the
the benchmark index's actively manage fund stock exchange. Buying
constituent stocks and selling of normal
without having to unit trusts are
invest in each of the subjected to
stocks directly. transaction costs which
are generally higher.

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Advantages of ETF

Shariah-compliant
Tradability Transparency
investment
• ETF units can be • ETF prices are • As for Islamic ETFs, an
bought and sold at disseminated additional benefit is its
anytime during trading throughout trading conformity to the
hours of the stock hours on the stock Shariah principles and
exchange exchange. The practices, which is
constituent stocks of important to Muslims.
the index which the Non-Muslims may also
ETF tracks are wish to invest in such
normally published on funds based on Shariah
the fund or index principles.
provider's websites.
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Disadvantages of ETF

• The performance of the ETF may be directly affected by the performance of its
component stocks/securities represented in the benchmark index
ETF are bound to
the ups and downs
• ETF fluctuate a lot.
of the market

• The performance of ETF is not representative of the performance of the

benchmark index.
• Moreover, frequent trading of ETFs could be significantly increase commissions
The risk of
tracking error and other costs such that they may offset any savings from low fees or costs.

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Shariah Compliant Exchange Traded Funds (I-ETF)

An Islamic ETF and The main difference An Islamic ETF is also

conventional ETF share between a conventional required to appoint a
common characteristics ETF and Islamic ETF is Shariah adviser/committee

The benchmark index that

the Islamic ETF tracks.
To provide expertise and
guidance to ensure its
structure, investment and all
matters related to the funds’
An Islamic ETF only tracks an activities are comply with
Islamic benchmark index Shariah.
where the index constituents
comprise of companies which
are Shariah-compliant.

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Summary

Exchange Traded Funds (ETF)

In this
Features of ETF
chapter you
have learned Nature of ETF with Respect
to Stocks and Unit Trusts
about:
Islamic Exchange Traded
Funds (I-ETF)

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► http://www.bursamalaysia.com/misc/system/assets/16597/eBroc
hure_eLnsert-ETF_list_281215.pdf
► Notes Islamic ETF, SC

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Thank you
Islamic-Exchange Traded Funds
(I-ETF)

Mahyuddin Khalid 18