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

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

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

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

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

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

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.

D. Islamic Indexes – Index Uses 8 8

D. Islamic Indexes – Index Uses 9 9

D. Islamic Indexes – Index Uses 10 10

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.

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

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.

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

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.

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

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

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

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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