Islamic exchange-traded funds as a modern mechanism to revitalize the financial markets: case study of the Saudi financial market

Abstract

Purpose. The present paper aims to clarify the importance of exchange-traded funds (ETFs) as one of the creative Islamic financial products that have attracted the attention of investors in recent years.

Results. This research concluded that: (i) Islamic ETFs are a useful and convenient option for Sharia-compliant investors who prefer this type of Sharia-compliant investment, whether they are beginners or want to diversify their stock investments without the hassle of research, analysis, and selecting the right companies. The fund itself consists of several stocks selected based on the nature of the indicator that the box simulates. (ii) Islamic ETFs are distinguished by their transparency as they are affiliated with a specific market index and their investments match the components of this index, such as if the fund is linked and affected by the movement of the general index of the market or a sector index, and the fund manager may set an index for his fund in coordination with a specialized body in this field. For example, he places an index of legitimate shares, it makes it simpler for the fund's unit owners to understand how well the fund is performing by comparing it to the performance of the indicators they monitor or model. (iii) From the same perspective, the method of creating an Islamic ETF is not different from its traditional counterpart, and the main difference between them lies in the benchmark index that Islamic ETFs track. (iv) Islamic ETFs invest only in companies that comply with Sharia regulations, and in the event that any stock in the index portfolio is not compatible, it is disposed of even if the expectations of its returns are high, and thus the investment opportunities for the Islamic ETF are in a narrow space compared to the investment opportunities available for traditional ETFs, which may reduce the opportunities for the fund's investment and affect the potential return of the fund. (v) The Islamic ETF industry is weak compared to its traditional counterpart, it has been witnessing a remarkable and important growth in the recent period, especially in the Gulf region, specifically Saudi Arabia, which is one of the regions most qualified to achieve significant growth rates in the Islamic ETF sector. (vi) In general, exchange-traded funds have an important place in the financial markets, especially the Saudi stock market, as investing in these funds would expand the base of the financial markets and give investors greater flexibility in choosing how to allocate their investments across market channels and sectors.

Scientific novelty. This study focuses on the general framework of ETFs, which aims to focus on Islamic ETFs by providing advantages and its most important dealers in addition to the mechanism of how Islamic ETFs work. Finally, the importance of Islamic ETFs in the financial markets was considered, specifically through a study of the case of the Saudi financial market, from which the study concluded that it is necessary to pay more attention to this important investment tool, although the industry of Islamic ETFs is weak compared to its counterpart; but, it has recently witnessed a remarkable and important growth, and it plays a major role in stimulating trading in the financial markets.

Practical value. The results of this study can be used in several financial markets, taking into account everything related to compliance with Islamic law.