By Eric Rosenbaum
Javelin Investment Management, a newly formed exchange-traded funds company, has filed with the Securities and Exchange Commission for the first U.S. ETF to be based on an Islamic index.
The JETS (Javelin Exchange Traded Shares) Dow Jones Islamic Market International Index Fund is the latest example of an ETF manager hoping to find success in the crowded ETF market with a first-of-its-kind portfolio.
Copycats are out, and niche strategies are in, as more managers enter the ETF space. Global X Funds has plans to launch a series of country ETFs that face no direct competition, while Northern Trust's NETS ETF family has launched a series of funds this year targeting previously untouched asset classes by U.S. ETF sponsors.
It is a fine line, though, between steering clear of the asset classes dominated by the big ETF companies, and creating portfolios so niche in nature that asset growth is a long haul.
What the JETS Dow Jones Islamic Market International Index Fund has going for it is not just the first-mover advantage with an Islamic ETF, but the overall size of the Islamic investment market. Various industry estimates put the size of Islamic investment at $700 billion currently, and project that the market is on its way to $1 trillion by 2010. It should be noted though that these estimates include a wide definition of "investment," which goes well beyond mutual funds.
Failaka, the Chicago and Dubai-based Islamic fund consultant, says there are 425 mutual fund and fundlike products worldwide, with approximately $18 billion in assets.
That $18 billion is still sizable, and what's more, major U.S. publications including BusinessWeek have written articles this year about the outperformance of Islamic funds due to their exclusion of Financial Services stocks. While those gains have been eaten away at by the more recent under-performance of the Energy sector, the idea of Islamic investment has received more mainstream press this year than ever before.
Does that mean that the U.S. market is ready to support an Islamic ETF? Failaka managing director Mark Smyth thinks that given the recent slide in energy, performance in the Islamic equity indexes worldwide has ended up comparable to traditional equity indexes this year. The real issue in the U.S., in his opinion, is effective distribution.
Currently, there are a handful of open-end mutual funds in the U.S. investing based on Shari'ah principles. Only one manager of these funds, however—Saturna Capital—has been a big success, with more than $1 billion in assets across its income ($500 million) and growth equity ($700 million) funds, according to Failaka.
Saturna has been in existence since 1989, and most of its asset growth has come in the previous four to five years, as it finally gained access to major retail fund platforms, Smyth notes.
Early Days Yet?
In terms of ETFs globally that track Islamic indexes, there are six total, three managed by Barclays Global Investors' London-based iShares European family. The ETFs have not raised considerable assets. All together, the six ETFs have less than $100 million in assets, according to the Failaka database, though it cautioned that its asset information was only through 1Q of 2008.
The three iShares—MSCI World Islamic, MSCI USA Islamic and MSCI Emerging Markets Islamic—have a combined $24 billion in assets, according to the iShares Web site, as of today.
BNP Paribas has an ETF based on the Dow Jones Islamic Titans Index, while Daiwa Securities launched an ETF based on a FTSE Shari'ah Japan 100 Japanese Equity Index.
The JETS portfolio will be the second tracking a Dow Jones index: the Dow Jones Islamic Market International Titans 100 Index. Excluded businesses include: alcohol, conventional financial services (banking, insurance, etc.), casinos/gambling, pornography, tobacco manufacturers, pork-related products and weapons companies.
Javelin Investment Management has been formed by two former officials of Philadelphia Brokerage, a boutique investment bank and brokerage house.
Brinton Frith, president of Javelin and its JETS ETFs, said he was limited in what he could say. However, he said that the company plans to launch a family of ETFs and that the Islamic ETF seemed like a good portfolio with which to enter the U.S. ETF market due to the lack of competing product and an existing Islamic investor base spread across institutional, high net worth and retail.
"I've been looking at a way to enter the ETF market for a long time," Frith said. "We recognized that the Islamic market in the U.S. is an underserved market. Being first to market should be beneficial, and being NYSE-listed could also give the ETF clout globally," Frith said.
The JETS Islamic ETF plans to list on the NYSE Arca, though its ticker and fee information are not yet available.
You can read the full registration statement here.