Retail traders should be better educated on the merits of the UAE's first exchange-traded fund, launched last month.
Budding ETF needs time to blossom
If you were to take a stroll around the trading floor of a UAE stock exchange and ask regular investors what an exchange-traded fund (ETF) is, you might expect a brief answer. But more often than not, the opposite is true. "ETF? What is that?" "Oh, and where is it listed?" These are not the kind of responses you would imagine to come from individuals attempting to earn a living from playing the markets. But when it comes to exchange-traded funds, expect surprises.
A group of investors sitting on couches at the far corner of Dubai Financial Market's (DFM) trading floor were more interested in watching flashing numbers on the giant digital boards than sharing their knowledge of ETFs. "Who can buy it, and how do you go about buying it?" asked Kishor Kumar, an Indian trader sitting on a comfy couch. "Even my broker doesn't know that." Ahmed, an Emirati who did not wish to disclose his last name, believed that he could tell me about an ETF.
"It's like, you know, when you need some cash, and you float a fund, and then you list it, but it's only for the institutional investors who have to buy through the bank," he said. "Not everyone can buy this. It's not for us." Ahmed has been trading on the Dubai bourse since its inception, about a decade ago. Unfortunately, his understanding of an ETF, and its explanation on how it trades, is not correct.
However, this knowledge deficit is likely to change in the near future. Last month the country's first ETF, the NBAD OneShare Dow Jones UAE 25, was listed on the Abu Dhabi Securities Exchange (ADX). This new fund, which has the ticker name 1UAE, now appears at the top of the live market-watch page on the ADX website. An ETF is a type of an open-ended investment fund that tracks a specific index, usually stocks or commodities. ETF's trade like shares, and can be bought and sold instantaneously. But they can represent a wide range of asset classes, regions and investment themes.
The first ETF was the SPDR S&P 500, which was launched by State Street Global Advisors in 1993. The fund gives investors an efficient way to mimic the results of the S&P 500 index, which tracks 500 large-cap common stocks on the US market and is regarded as a barometer of the US economy's health. ETFs have come a long way since then. In fact, they are among the fastest growing financial products; according to BlackRock, one of the world's largest asset management firms, ETF assets exceeded US$1 trillion (Dh3.67 trillion) by the end of 2009, up 45.7 per cent from $711 billion at the end of 2008.
1UAE allows investors to track the performance of 25 of the UAE's largest and most frequently traded stocks. The National Bank of Abu Dhabi established the fund with a US$10 million investment, just over half of which is in financial sector stocks, according to Alan Durrant, the bank's chief investment officer. Approximately 53 per cent of the funds assets are invested in Abu Dhabi, 42 per cent in the Dubai Financial Market and 5 per cent in Nasdaq Dubai.
The 1UAE is a matter of pride for NBAD, the largest lender in the emirate and the first bank in the region to create a fund that can be traded on an exchange. It is an even bigger win for ADX, which has been working on developing alternative equities products for years. But where ADX and NBAD have failed, according to local analysts, is an awareness campaign to educate investors about the product.
"I don't think either ADX or NBAD have targeted retail investors," said Wadah al Taha, a market analyst based in Dubai. "They are looking for corporate fund inflows for this new product." A publicity campaign targeting retail investors, he added, should have been a priority for both ADX and NBAD, as traders with smaller portfolios account for about 80 per cent of the investments in the country's stock exchanges. In fact, they are the backbone of regional trade.
Fadi al Said, the head of equities in the Middle East at ING Investment Management in Dubai, also feels an awareness drive is necessary. "You need a campaign, as no one is going to invest in something they don't understand," he said. The responses from investors on the DFM trading floor certainly support Mr al Said's point of view. Distributing pamphlets, holding seminars on the trading floor, or explaining how ETFs work through web-based tutorials would go a long way towards promoting their merits. However, a lack of knowledge among consumers does not seem to be slowing the expansion of ETFs in the region.
Just weeks after launching 1UAE, NBAD signed an agreement with The Global Fund to Fight AIDS, Tuberculosis and Malaria to launch a second ETF, called the Global Fund, on the ADX. Saudi Arabia's financial regulator, the Capital Market Authority, has also granted approval to list an ETF on that country's stock exchange, the Tadawul, which is the GCC's largest bourse. Managed by Falcom Financial Services, the ETF will be accessible to both nationals and foreigners.
But it is hard to judge the success of these funds in the absence of any meaningful liquidity, said Hassan Awan, an associate with the asset management division of The National Investor, an asset management firm based in Abu Dhabi. "In a young frontier market such as the UAE, to appeal to the appetites of investors with an ETF is difficult, but not impossible," Mr Awan said. Success, he said, will come as UAE-based investors broaden their investment horizons.
Back on the couches at the DFM, it is clear that for the majority of investors on the trading floor this transition will take time. "Ask around the floor who wants to invest in this share," said Imran Amjad, a Pakistani trader. "I guarantee you no one. Already there are too many risks in the shares we trade in and there is no need to know what the new stock is." email@example.com