© copyright 2010 dow jones and company, inc. the importance of indexes for etfs tariq al-rifai...

© Copyright 2010 Dow Jones and Company, Inc.

The importance of Indexes for ETFs

Tariq Al-RifaiDirector – Islamic Market Indexes2 March 2010First Islamic Investment & Finance Forum for the Middle East

Proprietary and Confidential |© Copyright 2010 Dow Jones and Company, Inc. 2

Overview

A. Structure of Islamic Finance

B. Current Snapshot of Islamic Finance

C. Dow Jones Index Products & Capabilities

D. Islamic Indexes- Index uses- Index rules and screens

E. Depth of Index Coverage

F. Growing Importance of ETFs

G. Islamic Fund Market- Size (equity vs. non-equity)- KSA market

H. What’s driving the market today

Proprietary and Confidential |© Copyright 2010 Dow Jones and Company, Inc.

Islamic Finance Industry

Institutional Banking

Takaful (Islamic Insurance)

Retail Banking

Consumer Finance

Wealth Management

Asset Management

Private Equity

Asset Management

Capital Markets

Investment Banking

A. Structure of Islamic Finance


B. Current Snapshot of Islamic Finance

In the middle of the 1970s, growing wealth and increasing influence in the global economy inspired Muslims to develop a new financial system that complied with Islamic philosophy.

Today there are approximately 600 Islamic financial institutions operating around the world, including banks, mutual fund providers, and issuers of Takaful - Islamic insurance.

Islamic financial institutions control at least $650 billion in worldwide assets (estimated).

There is less than $20 billion in Islamic equity funds comprising over 300 funds and only 7 Islamic ETFs (exchange traded funds)

There are an additional 300+ Islamic funds from various other asset classes including, short-term trading instruments, sukuk, real estate and private equity


Dow Jones Indexes is a leading full-service index provider that develops, maintains and licenses indexes for use as benchmarks and as the basis of investment products. Dow Jones offers more than 130,000 market indexes, providing solutions for nearly any indexing need:

C. Dow Jones Indexes Products and Capabilities

Traditional Equity

Indexes

Fixed-Income,

Alternative Asset Class

and Portfolio Indexes

Strategy and

Theme-Based

Indexes

Custom Index

Solutions


C. Dow Jones Indexes Products and Capabilities

Traditional Equity

Indexes

Fixed-Income,

Alternative Asset Class

and Portfolio Indexes

Strategy and

Theme-Based

Indexes

Custom Index

Solutions

Dow Jones Islamic Market

Indexes


D. Islamic Indexes

Indexes have a wide variety of uses:• Benchmarking (active funds)• Tracking (passive funds)• Structured products• ETFs

Index Rules• Each index is governed by a set of rules that set it apart from other indexes (i.e. operating guidelines)• These rules establish the guidelines for securities to be included or excluded in an index (such as type of security, size, location, trading volume)• Once established, index rules rarely change


D. Islamic Indexes – Index Uses


D. Islamic Indexes

DJIM Index Screens:

Phase 1: Industry Type

Excluded are companies that represent the following lines of business:

• Alcohol – Tobacco – Pork-related products – Financial services – Defense/weapons – Entertainment

Phase 2: Financial Ratios

Excluded are companies whose:

• Total debt divided by trailing 24-month average market capitalization is 33% or more.

• Cash and interest-bearing securities divided by trailing 24-month average market capitalization is 33% or more.

• Accounts receivables divided by trailing 24-month average market capitalization is 33% or more.


E. Depth of Index Coverage

Countries (>68)• DJIM U.S. Index• DJIM U.K. Index• DJIM France Index• DJIM Kuwait Index• DJIM Malaysia Index• DJIM Morocco Index• DJIM UAE Index

Regions (>25)• DJIM Asia/Pacific Index• DJIM Euro Index• DJIM GCC Index• DJIM MENA Index• DJIM Africa Index



ETFs represent a $1 trillion market… and growing

Why are investors around the world increasingly investing in ETFs:

Passive investing has been proven to outperform active funds over the long term.

ETFs are an efficient low-cost way to invest in equities.

Since ETFs must track an index, the rules are clear and transparent leaving investors with peace-of-mind.

ETFs are an attractive tool that lets investors from around the world access local markets.



Source: Dow Jones Indexes, 31 August 2009


E. Islamic Fund Market

• How big is the Islamic fund market?

• What are the most common types of funds?

• Where are the investors for Islamic funds?



Islamic Fund Market AUM ($ billions)

16,217

6,399

5,196

3,919

8,599

Equity Fixed Income Real Estate and PE Commodities Other

Source: Ernst & Young, Islamic Funds and Investment Report 2009



AUM by Country ($ billions)

USA

KSA

Kuwait

Malaysia

Bahrain

UAE

Other




Number of Funds by AUM

-

50

100

150

200

250

300

<20 20-50 50-100 100-200 200-300 300-500 >500

AUM ($ millions)

No

. of

Fu

nd

s



F. What’s Driving the Islamic Market Today

Local and regional investments only Exchange traded funds (ETFs) Structured products based on an index Sukuk and sukuk funds Some/growing interest in commodity funds


www.djindexes.com

© copyright 2010 dow jones and company, inc. the importance of indexes for etfs tariq al-rifai...

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