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Diversification The Major Driver in Exchange Traded Funds
Mar 11, 2022
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Review of 2021
The ETF market reached an important milestone as the worldwide inflows hit the US$1 trillion benchmark for the first time at the end of November 2021 surpassing last year total of $736 billion.
In 2015, PWC published its 2nd Annual Global Exchange Traded Funds (ETFs) survey and predicted the global ETF asset to exceed $7 trillion by 2021 and behold the current ETF global asset as at November 2021 close to $9.5 trillion.
Moreover, there is a record of 406 new issuances of ETF as of end November 2021. This number of ETF issuance was 27% higher than last year’s issuance of 319 ETFs. This brings the current ETF on offer at 2,688.
One of the key points of the significant positive inflows of ETFs in 2021 is that the historically low interest rates have also forced many investors to rethink the traditional stock-bond allocation strategy and allocate more to equities.
However, the volatile equity markets in 2021 have led to more investors made their way to index products which benefitted ETF. Furthermore, there are a lot of new entrants into investing since the pandemic in 2020 and people are more cost conscious. As retail investor try to save on commission, an ETF is a lot cheaper than a mutual fund.
During the same period, global Islamic ETF fund performed well. The one-year performance of iShares MSCI USA Islamic UCITS ETF, iShares MSCI World Islamic UCITS ETF 2021 and SP Funds S&P 500 Sharia Industry Exclusions ETF one year performance in 2021 stood at 30%, 23% and 33% respectively.
Preview of 2022
Globally, government and central bank are rolling back its pandemic stimuli and are expected to raise interest rate in 2022 to manage the high inflation in 2020 and 2021. The Bank of England is the first major central bank to raise interest rate since COVID-19 hits in 2020 amid the fears of Omicron variant could slow the economy.
Despite the possibility of increase in interest rates, there is still a lot of time needed to control the decade high inflation on top of the fear of new COVID-19 variant. If low interest rate environment persists in 2022, there could still be high inflows into equity ETFs, especially those that have higher possibility to beat inflation.
One main area that are garnering interest for ETF is thematic investing, especially on the UN Sustainable Development Goals (SDGs). ETFs have developed a positive reputation in the context of targeting niche sectors. Now there are ETFs servicing almost every SDGs, including products with a focus on clean water, gender, equality, and infrastructure.
Moving forward, there will be more innovation in ETF issuance to serve this market as the ETF issuers hope to capture a segment of the growing popularity of environmental, social and governance investing, where investors seek to align their personal values with their investment.
Furthermore, another highlight will be more country issuing its first Islamic Exchange Traded Fund (ETF). 2021 see Russia and Canada issue its first Sharia complaint ETFs as these countries see a bigger role for Islamic Finance to serve the public.
However, the focus may still be on the equities-based ETFs rather than Sukuk due to low yield environment and high inflation.
Conclusion
Investor demand for ETFs has seen a tremendous increase over the past years. Diversification remains the major driver behind choosing to invest in ETFs by reducing individual stock exposure risk and lower cost.
However, investor should remain cautious when investing in ETFs. One of the oldest ETF is the SPDR S&P 500 ETF (SPY) was launched in 1993 and since then 3,751 ETF have been brought to the market. But, there are only 2,688 ETFs currently in the market as 28% of the ETFs have since been closed. Although there are plenty of choices for investors to invest in ETFs, time-tested strategies, low fees, and high liquidity may be the best especially for beginners.
Written by: AHMAD AL IZHAM IZADIN
Source: Diversification The Major Driver in Exchange Traded Funds (2022, 01 January). IFN Islamic Finance news. Retrieved from https://www.islamicfinancenews.com/diversification-the-major-driver-in-exchange-traded-funds
Disclaimer
The information provided in this report is of a general nature and has been prepared for information purposes only. It is not intended to constitute research or as advice for any investor. The information in this report is not and should not be construed or considered as an offer, recommendation or solicitation for investments. Investors are advised to make their own independent evaluation of the information contained in this report, consider their own individual investment objectives, financial situation and particular needs and should seek appropriate personalised financial advice from a qualified professional to suit individual circumstances and risk profile.
The information contained in this report is prepared from data believed to be correct and reliable at the time of issuance of this report. While every effort is made to ensure the information is up-to-date and correct, Bond and Sukuk Information Platform Sdn Bhd (“the Company”) does not make any guarantee, representation or warranty, express or implied, as to the adequacy, accuracy, completeness, reliability or fairness of any such information contained in this report and accordingly, neither the Company nor any of its affiliates nor its related persons shall not be liable in any manner whatsoever for any consequences (including but not limited to any direct, indirect or consequential losses, loss of profits and damages) of any reliance thereon or usage thereof.
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