Investment lessons: Now is the time to focus on ETF assets in the MENA region

2020 acted as a catalyst for the Middle East, with Covid-19 and the oil price drop underlining the importance of diversification and building resilient economies. Across the Gulf, we experienced the intensification of efforts to introduce change, diversification and innovations. While we have seen some disruption in financial services, the exchange-traded funds (ETF) landscape in the region has been slow to get off the mark. More needs to be done to tap into its potential.

ETFs have been available since the early 1990s attracting interest from all types of investors for their multi-asset, multi-market diversified exposure and cost efficiency. Now in 2020, there are more than 6,970 ETFs globally holding more than $7 trillion in assets from more than 400 providers, according to London-based ETFGI. However, ETFs in the Middle East fade in comparison.

GCC equity markets with a combined market capitalisation of $3.1 trillion only have ETFs worth $285m. The number of ETFs based on GCC assets is abysmally low with only a handful of locally-listed ETFs, and trading volumes are low. Saudi Arabia has three such funds, each of which have less than $7m of assets. While there are large MENA ETFs, such as the iShares MSCI Saudi Arabia ETF KSA with $528.45m in assets, these are listed overseas.

So why haven’t ETFs picked up as fast in the GCC area?

There are a number of reasons for the relatively low birth rate. According to a study by Marmore, a research subsidiary of Kuwait Financial Centre Markaz, take up of ETFs is low in GCC countries due to a lack of financial literacy and investor participation in capital markets.

I agree with this assessment. The benefits of ETFs are not fully grasped and ETFs are not seen as the investment tool that they are, so understanding must grow among investors. But, these reasons also only touch at the surface.

The reason for the dearth of locally-listed ETFs is due to two main reasons. Firstly, long-term institutional investors like pension funds, university endowments, and sovereign wealth funds, do not have a targeted allocation to regional equity markets, Secondly, there is a lack of regulations around authorised investment advisors (eg. outsourced chief investment officer (OCIO) in the US), who advise clients on an optimal asset allocation to meet their investment needs. In Europe and the US, regulations are also used to control foreign fund flow into the country and enhance the local asset management regime.

Despite the challenges, 2018 may have been a turning point for ETFs in the region. Five new ETFs listed in regional stock exchanges and there has been steady growth since then. This year, we launched our Chimera S&P Shariah ETF, which after only six months ranks third largest in assets in the region. Looking ahead, with a global roll out of the vaccine looking imminent, experts believe that the MENA economies, including the ETFs market, will bounce back strongly in 2021. Interestingly, with debates on the possibility of investors moving away from US investments and instead looking to international markets, the Middle East is reasserting itself and opening up to foreign investment.

What we are seeing is the tectonic shift in the region’s ETF landscape. This is only the beginning and all types of investors, retail and institutional, local and foreign, young and old, should study this change and take note. Locally-listed ETFs are a simple, cost-effective and efficient investment tool and will increasingly be used as such in the coming months and years.

Seif Fikry is the CEO and Sherif Salem, CIO public markets of Chimera Capital