Chimera Capital LLC, owned by Abu Dhabi-based private investment firm Chimera Investment LLC, is licensed and regulated by the UAE’s Securities & Commodities Authority (SCA). Established in 2007, Chimera Investments LLC manages a diversified portfolio of listed and unlisted equities in both local and regional markets.
Since 2020, when the firm launched the first ETF tracking a Shariah-compliant index in the UAE, it has brought to the regional market various ETF products.
Most recently, in February this year, it launched its Chimera S&P Kuwait Shariah Compliant Exchange Traded Fund which tracks the performance of the S&P Kuwait Shariah Liquid 35/20 Capped Index.
Prior to that, in January this year, Chimera Capital LLC launched its Chimera S&P KSA Shariah Compliant Exchange Traded Fund, a physical, in-kind, liquid, and fully fungible exchange-traded fund (ETF).
The ETF has been designed to replicate the S&P Saudi Arabia Shariah Liquid Top 30 – 35/20 Capped Index. The index is provided by S&P Dow Jones Indices and tracks the performance of the top 30 most liquid Shariah-compliant equities listed on the Saudi Exchange.
Besides, the firm has also launched other exchange-traded funds (ETFs) in the UAE and the GCC market, such as Chimera S&P UAE Shariah ETF, and Chimera S&P UAE UCITS ETF.
In August last year, Chimera Capital announced that its Chimera S&P UAE Shariah ETF surpassed AED 100 million (USD 27.2 million) in assets under management (AUM) during July 2021.
Sherif Salem, Chief Investment Officer – Public Markets at Chimera Capital, talks about the exchange-traded funds (ETF) market in the GCC/ Middle East and the challenges as well as opportunities for this particular asset class.
Sherif Salem, Chief Investment Officer – Public Markets at Abu Dhabi-based Chimera Capital, talks about the exchange-traded funds (ETF) market in the GCC and the challenges as well as opportunities for this particular asset class.
Could you please give us an overview of the Exchange Traded Funds (ETF) market in the Gulf region (GCC) and the wider Middle East?
The ETF market in the Middle East is in a very nascent stage. Currently, the AUM of ETFs listed in MENA equity markets is approximately $475 million, and there are MENA-focused ETFs listed in US and UK markets with an AUM of $2.6 billion. That pales in comparison with the global $10 trillion ETF industry.
The number of ETFs based on MENA assets is also extremely small with only a few locally listed ETFs. There are currently thirteen ETFs listed on the MENA markets; six are listed in the UAE (all are Chimera ETFs), three in Saudi Arabia, two in Qatar, and one in Egypt making Chimera the largest issuer of ETFs in the region.
The number of ETFs based on GCC assets, including those domiciled outside the region, is abysmally low. What are the reasons behind that?
There are few locally listed ETFs in the region due to the absence of sophisticated laws and regulations surrounding the ETF settlement cycle. The ETF industry is also a low-cost, low-margin business that many views as a heavy barrier to entry.
Compared to other developed and emerging markets, the awareness of ETFs and retail investor participation are also quite low in the GCC. Is it because regional investors do not have a targeted allocation to capital markets?
Yes, it’s true that that is another reason; long-term institutional investors like pension funds, university endowments, and sovereign wealth funds, do not have a targeted allocation to regional equity markets.
But additionally, there is also a lack of regulations around authorized investment advisors, (e.g. Outsourced Chief Investment Officer (OCIO) in the US), who advise clients on an optimal asset allocation to meet their investment needs. In Europe and the US, regulations are also used to control foreign fund flow into the country and enhance the local asset management regime.
Are you seeing an increasing appetite for ETFs among investors in the region? If so, which is the dominant class of investors showing greater participation in this asset class than others?
Appetite from HNWI as well as local and GCC institutional investors has been gradually increasing for the Chimera ETFs, and local retail investors’ engagement is slowly increasing. Interest, locally and regionally, is also building momentum.
We expect it to continue improving in the coming period as retail and institutional investors become more comfortable with this innovative product and learn more about the benefits of an ETF.
What are the emerging trends you are seeing in the ETF asset class in the GCC?
It is too early to talk about trends due to the nascent stage of the ETF industry in the Middle East. But we see that there are ample opportunities for further developing and expanding the ETF industry in the region.
How has been the performance of your ETFs so far?
We launched our first ETF in July 2020. The Chimera S&P UAE Shariah ETF launched with an AUM of AED2M ($545k), grew to AED50M ($13.6M) within six months, and at the end of April 2022 had reached AED127.8M ($24.6M).
In 2021, we launched the Chimera S&P UAE UCITS ETF, and most recently we launched the Chimera S&P KSA Shariah ETF (January 2022) and Chimera S&P Kuwait Shariah ETF (February 2022) – total assets under management across the six ETFs is AED 450 million ($122.6 million).
More importantly, the trading volumes in the secondary have been increasing considerably. In 2020, the ETFs’ value traded in the secondary market was averaging AED5.6 million per month.
In 2021, they averaged AED 18.6 million, and for the first four months of this year, they are averaging AED41.4 million. In the primary markets, there has also been a gradual increase, where total
How do you see the regulatory structure and costs of ETF launch, listing, and distribution in the Middle East, compared to other markets?
The regulatory structure in the UAE has evolved and developed a lot over the past few years. Specifically, the regulatory structure surrounding ETFs now is approaching the level of the more developed markets. But the ETF ecosystem and regulations around it still have room to improve.
The infancy stage of the fund industry in general in the Middle East makes fees higher relative to the more developed markets, due to the lower size of AUM in the region.
Additionally, the regulatory environment, while more developed than before, is still challenging which causes time to market to take longer than in the more developed markets, thereby increasing costs further.
What do you consider to be important factors in attracting more regional as well as international asset managers toward the GCC ETF market?
ETFs are an investment tool that serves different types of local and regional asset managers; the long-only fund managers use ETFs for cash management purposes and the hedge funds use them for hedging purposes. As the size, liquidity, and variety of ETF offerings increase, the interest will grow.
What kinds of investors have you been targeting for your ETFs?
We are seeing increased appetite from HNWI as well as local and GCC institutional investors for the Chimera ETFs, while local retail investors have been slowly getting involved. Interest, locally and regionally, is slowly building momentum. We expect it to continue improving in the coming period as retail and institutional investors become more comfortable with this new and innovative product and learn more about the benefits of an ETF.
How do you view the environment for fundraising over the coming 12 months?
When our first ETF was launched in July 2020, the fund closed with AED 2 million in AUM. As of the end of May 2022, across 6 ETFs there are AED 450 million assets under management. So, we have seen tremendous uptake from investors. Additionally, in the secondary market, where investors can buy and sell the ETFs in the stock market, activity has been steadily increasing. In May 2022, The Chimera ETFs traded a total of AED 62.7 million in the secondary market, the second-highest total this year and the third-highest since the launch of Chimera’s first ETF in July 2020. Large trading volumes for the month of May boosted the total traded value across Chimera’s six listed ETFs during the first five months of the year to AED 259.6 million, surpassing the AED 223.2 million that was traded during all of 2021.
Let us take a deeper dive into the Chimera S&P UAE UCITS ETF that had declared dividends very recently. How is it different from other UCITS ETFs in the marketplace? What type of an investor should use this ETF, and when should the investor use this ETF in his or her portfolio?
Currently, there are no UCITS ETFs in the regional stock markets. The UCITS product complements the shariah ETFs, providing investors with different investment tools to meet their investment needs and preferences. Moreover, both the UAE Shariah and UAE UCITS ETFs offer both dividend-paying share classes and accumulating share classes, which is a first in the region.
The physical-in-kind ETF, the first of its kind in the UAE and MENA provides all types of investors with an investment tool to access an index and diversify their equity investment exposures.
ETFs are useful investment tools for both retail and institutional investors. In the past, for the retail investor, investing in UAE stock markets meant buying single stocks, but now an investor can buy an index.
ETFs, provide investors with a liquid and cost-effective investment tool that offers balanced and diversified exposure to UAE-listed stocks through a single trade. Like stocks, investors can track the price of the ETF through its iNAV (indicative net asset value) on the ADX and DFM during the trading day, and the ETF’s holdings are published daily on the Chimera website.
For institutional investors, there is the added benefit of ETFs providing an instrument for liquidity management to deploy cash surplus to take advantage of short-term market movements, interim beta to maintain market exposure while refining a long-term view for their overall portfolio, and portfolio completion to fill gaps in a carefully selected core equity portfolio to take advantage of a broad market movement that may include stocks that may not have a fundamental story.
ETFs are also the perfect investment product for monthly contribution plans, such as savings plan investment by enabling any investor to buy units of an ETF through a disciplined approach by investing fixed investment amounts regularly each month. It allows you to accumulate a portfolio at a potentially reduced cost, without the need to start with huge initial capital.
While ETFs can be easily traded on the secondary market, where two liquidity providers ensure that there is ample liquidity on the bid and offer, and the spread is trading closely around the iNAV, ETFs can also be traded in the primary market.
If there is not ample demand or supply in the secondary market, an authorized participant (AP) can create or redeem units to satisfy investors’ orders. In summary, ETFs are a highly regulated product, providing all types of investors an investment tool to easily access the market quickly and efficiently.