Products
Bursa Malaysia offers a holistic range of innovative Islamic Market products from equities and commodities to sukuk.
Islamic Capital Market
Shari'ah Compliant Exchange Traded Funds (iETFs)
An Exchange Traded Funds (ETFs) is an innovative financial product that exhibits the best of open-ended fund and listed stock features. In the Securities Commission Malaysia’s Guidelines on Exchange Traded Funds, ETF is defined as “a listed index-tracking fund structured as a unit trust scheme or any other approved structures whose primary objective is to achieve the returns that correspond to the performance of a particular index”. To put it simply, ETF is actually unit trust listed and traded on a stock exchange. It is passively-managed in general as ETF aims to replicate the performance of a particular market index, either by investing all (full replication) or substantially all (strategic sampling) in the constituent securities.
What is iETF?
Unlike conventional ETF that has the liberty to track any benchmark index regardless of the Shari’ah status of the component stocks, an iETF tracks only benchmark index where the index constituents are Shari’ah compliant companies. Apart from that, the management of iETF has to strictly observe the Shari’ah principles and Islamic investment guidelines. The operation of iETF is also overseen by a Shari’ah committee or advisor who would conduct Shari’ah compliant audits and reviews from time to time.
Before it can be qualified as iETF, a fund needs to undergo a comprehensive Shari’ah methodology – industry as well as financial ratio screenings. Industry screening is meant to ensure that the fund invests only in companies that operate Shari’ah compatible business. For those companies with income derived from mixed business activities, they are subject to certain tolerance parameters before they can be regarded as Shari’ah compliant. Financial ratio screening follows where it is ensured that the interest-based financing and investment of these companies do not exceed the acceptable ratio.
In order to abide by the need for Shari’ah compliance, these industry and financial ratio screenings take place at the time of investment decision and subsequently throughout the investment period. The periodic monitoring also takes into account any corporate actions like mergers, delisting or bankruptcy. The fund is purified from time to time by identifying, separating and donating to charity any Shari’ah non-compliant income.
Industry screening
Excluded companies are those that represent lines of business comprising alcohol, entertainment (hotels, gambling, casino, cinemas, theatres, music, pornography and the like), weapons and defence, tobacco, conventional financial services (banking and insurance), pork and non-halal food, biotechnology companies involved in human/animal genetic engineering and other sectors determined by the Shari’ah committee from time to time.
For companies with mixed contribution from Shari’ah permissible and non-permissible activities, they are deemed Shari’ah compliant should the following thresholds are complied with:
- The income from clearly prohibited activities like the conventional banking, pork and non-halal food production or gambling must be less than 5% of the total turnover (TO) or profit before tax (PBT);
- The interest income from fixed deposit and income from tobacco business is supposed to be less than 10% of TO and PBT;
- The rental income from unlawful activities like rental income from premises used for gambling, liquor production and the like should not be more than 20% of TO and PBT; and
- The income from resort and hotel businesses, stock broking and share trading of Shari'ah non-compliant stock must not exceed 25% of TO and PBT.
Financial ratio screening
Below ratios must not exceed 33% for a company to be considered Shari’ah compliant:
| a. Ratio 1 = | Total Debt |
| Trailing 12-month average market capitalisation |
| b. Ratio 2 = | Cash + Interest bearing securities |
| Trailing 12-month average market capitalisation |
| c. Ratio 3 = | Accounts receivables |
| Trailing 12-month average market capitalisation |
How to invest in iETF?
iETF can be bought and sold through stockbrokers. At present, there is one iETF listed and traded on the Exchange – MyETF Dow Jones Islamic Market Malaysia Titans 25 (MyETF-DJIM25). Managed by i-VCAP, it is the first national ETF and the first Shari’ah compliant ETF in Asia.
Why invest in iETF?
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Diversified Exposure
Through one unit of iETF, investors get immediate exposure to the companies that constitute the tracked index.
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Cost effectiveness
As the fund is passively managed, the management fee is considerably low. This makes iETF an economical long run investment.
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Simplicity
iETF is listed on Bursa Malaysia's Main Market just like stocks; trading of iETF units is done on its current market price in a single transaction. Investors may do it online or through their stockbrokers.
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Transparency
Comprehensive information on an iETF can be obtained from the fund manager's website. iETF constituents, price and other relevant information are updated on daily basis.