1. The importance of Indexes for ETFs
Tariq Al-Rifai
Director – Islamic Market Indexes
2 March 2010
First Islamic Investment & Finance Forum for the Middle East

2. Overview Structure of Islamic Finance
Current Snapshot of Islamic Finance
Dow Jones Index Products & Capabilities
Islamic Indexes - Index uses - Index rules and screens
Depth of Index Coverage
Growing Importance of ETFs
Islamic Fund Market - Size (equity vs. non-equity) - KSA market
What’s driving the market today 2 2

3. A. Structure of Islamic Finance
Islamic Finance Industry
Institutional Banking
Takaful (Islamic Insurance)
Retail Banking
Wealth Management
Investment Banking
Asset Management
Capital Markets
Asset Management
Consumer Finance
Private Equity

4. B. Current Snapshot of Islamic Finance
In the middle of the 1970s, growing wealth and increasing influence in the global economy inspired Muslims to develop a new financial system that complied with Islamic philosophy.
Today there are approximately 600 Islamic financial institutions operating around the world, including banks, mutual fund providers, and issuers of Takaful - Islamic insurance.
Islamic financial institutions control at least $650 billion in worldwide assets (estimated).
There is less than $20 billion in Islamic equity funds comprising over 300 funds and only 7 Islamic ETFs (exchange traded funds)
There are an additional 300+ Islamic funds from various other asset classes including, short-term trading instruments, sukuk, real estate and private equity

5. C. Dow Jones Indexes Products and Capabilities
Dow Jones Indexes is a leading full-service index provider that develops, maintains and licenses indexes for use as benchmarks and as the basis of investment products. Dow Jones offers more than 130,000 market indexes, providing solutions for nearly any indexing need:
Traditional Equity Indexes
Strategy and Theme-Based Indexes
Fixed-Income, Alternative Asset Class and Portfolio Indexes
Custom Index Solutions 5 5

6. C. Dow Jones Indexes Products and Capabilities
Dow Jones Islamic Market Indexes
Traditional Equity Indexes
Strategy and Theme-Based Indexes
Fixed-Income, Alternative Asset Class and Portfolio Indexes
Custom Index Solutions 6 6

7. D. Islamic Indexes Indexes have a wide variety of uses:
Benchmarking (active funds)
Tracking (passive funds)
Structured products
ETFs
Index Rules
Each index is governed by a set of rules that set it apart from other indexes (i.e. operating guidelines)
These rules establish the guidelines for securities to be included or excluded in an index (such as type of security, size, location, trading volume)
Once established, index rules rarely change
Moving on to the quantitative screens that are part of the index methodology…
There are 2 sets of screens: industry screens and financial ratio screens.
The first set of screens are related to a company’s line of business.
Using the ICB Sector Classification system, we systematically exclude industries that are incompatible with Islamic investment criteria. These industries are listed above.
Sometimes we can exclude an entire sector, like ICB’s “Gambling” sector. That’s the easy part. But sometimes it gets a little tricky.
For example, Louis Vuitton, the European luxury goods maker, is known mostly for its hand bags and other leather goods, and is categorized by ICB under “Clothing & Accessories.”
But it is also the owner of Moet champagne, Hennessy liquor and dozens of other alcoholic beverages.
So it would not be included in the DJIM Indexes.
If, some day, they sold off that part of the business, it would be allowed in, so long as it met the other index criteria.

8. D. Islamic Indexes – Index Uses8 8

9. D. Islamic Indexes – Index Uses9 9

10. D. Islamic Indexes – Index Uses10 10

11. D. Islamic Indexes DJIM Index Screens: Phase 1: Industry Type
Excluded are companies that represent the following lines of business:
Alcohol – Tobacco – Pork-related products – Financial services – Defense/weapons – Entertainment
Phase 2: Financial Ratios
Excluded are companies whose:
Total debt divided by trailing 24-month average market capitalization is 33% or more.
Cash and interest-bearing securities divided by trailing 24-month average market capitalization is 33% or more.
Accounts receivables divided by trailing 24-month average market capitalization is 33% or more.
Moving on to the quantitative screens that are part of the index methodology…
There are 2 sets of screens: industry screens and financial ratio screens.
The first set of screens are related to a company’s line of business.
Using the ICB Sector Classification system, we systematically exclude industries that are incompatible with Islamic investment criteria. These industries are listed above.
Sometimes we can exclude an entire sector, like ICB’s “Gambling” sector. That’s the easy part. But sometimes it gets a little tricky.
For example, Louis Vuitton, the European luxury goods maker, is known mostly for its hand bags and other leather goods, and is categorized by ICB under “Clothing & Accessories.”
But it is also the owner of Moet champagne, Hennessy liquor and dozens of other alcoholic beverages.
So it would not be included in the DJIM Indexes.
If, some day, they sold off that part of the business, it would be allowed in, so long as it met the other index criteria.

12. E. Depth of Index Coverage
Countries (>68)
DJIM U.S. Index
DJIM U.K. Index
DJIM France Index
DJIM Kuwait Index
DJIM Malaysia Index
DJIM Morocco Index
DJIM UAE Index
Regions (>25)
DJIM Asia/Pacific Index
DJIM Euro Index
DJIM GCC Index
DJIM MENA Index
DJIM Africa Index
The DJIM indexes are not just in large markets, like the US and the UK.
There are DJIM indexes for almost every market that is covered by secular Dow Jones indexes. And they are not just big countries like the US, Canada, Australia and Japan.
There are DJIM country indexes for small, emerging and frontier markets.
There are DJIM regional indexes for Asia/Pacific countries, the GCC countries, Euro-based countries.
There are DJIM titan indexes that follow the largest, most dominant firms that are based in these countries, like the DJIM Malaysia Titans 25 index and the DJIM DFM, or Dubai Financial Market, Titans 10 index.
There is interest among our clients and money managers in general for these groups. 12 12

13. F. Growing Importance of ETFs
ETFs represent a $1 trillion market… and growing
Why are investors around the world increasingly investing in ETFs:
Passive investing has been proven to outperform active funds over the long term.
ETFs are an efficient low-cost way to invest in equities.
Since ETFs must track an index, the rules are clear and transparent leaving investors with peace-of-mind.
ETFs are an attractive tool that lets investors from around the world access local markets.
Moving on to the quantitative screens that are part of the index methodology…
There are 2 sets of screens: industry screens and financial ratio screens.
The first set of screens are related to a company’s line of business.
Using the ICB Sector Classification system, we systematically exclude industries that are incompatible with Islamic investment criteria. These industries are listed above.
Sometimes we can exclude an entire sector, like ICB’s “Gambling” sector. That’s the easy part. But sometimes it gets a little tricky.
For example, Louis Vuitton, the European luxury goods maker, is known mostly for its hand bags and other leather goods, and is categorized by ICB under “Clothing & Accessories.”
But it is also the owner of Moet champagne, Hennessy liquor and dozens of other alcoholic beverages.
So it would not be included in the DJIM Indexes.
If, some day, they sold off that part of the business, it would be allowed in, so long as it met the other index criteria.

14. F. Growing Importance of ETFs
Source: Dow Jones Indexes, 31 August 2009 14

15. E. Islamic Fund Market How big is the Islamic fund market?
What are the most common types of funds?
Where are the investors for Islamic funds?
Moving on to the quantitative screens that are part of the index methodology…
There are 2 sets of screens: industry screens and financial ratio screens.
The first set of screens are related to a company’s line of business.
Using the ICB Sector Classification system, we systematically exclude industries that are incompatible with Islamic investment criteria. These industries are listed above.
Sometimes we can exclude an entire sector, like ICB’s “Gambling” sector. That’s the easy part. But sometimes it gets a little tricky.
For example, Louis Vuitton, the European luxury goods maker, is known mostly for its hand bags and other leather goods, and is categorized by ICB under “Clothing & Accessories.”
But it is also the owner of Moet champagne, Hennessy liquor and dozens of other alcoholic beverages.
So it would not be included in the DJIM Indexes.
If, some day, they sold off that part of the business, it would be allowed in, so long as it met the other index criteria.

16. E. Islamic Fund Market
DJIM indexes are used in the same exact way as their secular counterparts.
The components are the same as used in other Dow Jones indexes.
So they can be employed as the underlying basis for exchange traded funds – and Brint will be talking about that in a moment.
They can be used for structured products; for futures and options.
DJIM indexes are also used as benchmarks for both Shari’ah compliant portfolios and secular investors as well.
In other words, they are usable for observant Muslims, as well as people whose belief systems and ethics agree with Islamic financial principles.
That is one of the reasons that DJIM indexes have taken off around the world and in so many ways, I’m happy to say.
That’s all for me. I hope this has been enlightening and i’m looking forward to hearing from Brint now….
Source: Ernst & Young, Islamic Funds and Investment Report 2009

17. E. Islamic Fund Market
DJIM indexes are used in the same exact way as their secular counterparts.
The components are the same as used in other Dow Jones indexes.
So they can be employed as the underlying basis for exchange traded funds – and Brint will be talking about that in a moment.
They can be used for structured products; for futures and options.
DJIM indexes are also used as benchmarks for both Shari’ah compliant portfolios and secular investors as well.
In other words, they are usable for observant Muslims, as well as people whose belief systems and ethics agree with Islamic financial principles.
That is one of the reasons that DJIM indexes have taken off around the world and in so many ways, I’m happy to say.
That’s all for me. I hope this has been enlightening and i’m looking forward to hearing from Brint now….
Source: Ernst & Young, Islamic Funds and Investment Report 2009

18. E. Islamic Fund Market
DJIM indexes are used in the same exact way as their secular counterparts.
The components are the same as used in other Dow Jones indexes.
So they can be employed as the underlying basis for exchange traded funds – and Brint will be talking about that in a moment.
They can be used for structured products; for futures and options.
DJIM indexes are also used as benchmarks for both Shari’ah compliant portfolios and secular investors as well.
In other words, they are usable for observant Muslims, as well as people whose belief systems and ethics agree with Islamic financial principles.
That is one of the reasons that DJIM indexes have taken off around the world and in so many ways, I’m happy to say.
That’s all for me. I hope this has been enlightening and i’m looking forward to hearing from Brint now….
Source: Ernst & Young, Islamic Funds and Investment Report 2009

19. F. What’s Driving the Islamic Market Today
Local and regional investments only
Exchange traded funds (ETFs)
Structured products based on an index
Sukuk and sukuk funds
Some/growing interest in commodity funds
DJIM indexes are used in the same exact way as their secular counterparts.
The components are the same as used in other Dow Jones indexes.
So they can be employed as the underlying basis for exchange traded funds – and Brint will be talking about that in a moment.
They can be used for structured products; for futures and options.
DJIM indexes are also used as benchmarks for both Shari’ah compliant portfolios and secular investors as well.
In other words, they are usable for observant Muslims, as well as people whose belief systems and ethics agree with Islamic financial principles.
That is one of the reasons that DJIM indexes have taken off around the world and in so many ways, I’m happy to say.
That’s all for me. I hope this has been enlightening and i’m looking forward to hearing from Brint now….

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