An Exchange Traded Fund is similar to an index fund but trades like a common stock on a stock exchange. 

The main advantage of an ETF over other mutual funds is that they are simple investments that represent a basket of securities (usually including share classes of other funds). Like Unit Trusts, they are traded on the Stock Market. 

However, unlike unit trusts, their aim is not long term growth but more speculative short-term capital appreciation, i.e. they are traded far more frequently than unit trusts by most investors/traders. They are also seen as a tool that provides diversification.

ETFs have been slow to catch on in the Middle East and Africa, with many investors still preferring traditional investment products such as unit trusts. 

However, the MENA region is an attractive market for ETFs due to its relatively small size and a big appetite for investments in this asset class. 

Many family savings tend to be put into cash or deposit accounts during economic uncertainty. 

The Mena region stands out as one of the strongest growing economies in recent years, particularly off-shore Dubai. 

In fact, from 2009 through 2011, the GCC stock markets were among the world’s best-performing equity markets, second only to China’s Shanghai Composite Index, which went up by 100% since 2008 while the Mena region went up by 600%.

The Dubai Financial Market (DFM) General Index Fund is a recent and well-known MENA ETF, which tracks the DFM General Index. The DFM General Index comprises all stocks traded on the First Section of the DFM, including both UAE and GCC companies.

ETFs can be risky and considered speculative investments due to frequent trading and generally short-term investment horizon. 

In addition, the fees for each fund would be considerably higher than traditional investment structures due to their frequent trading nature and access to brokers in the secondary market. 

But for experienced investors who are looking for short to medium-term investment, ETFs are an excellent alternative.

The advantages of ETFs in Mena 

  • Low Fees compared to traditional investment structures. 
  • Low barrier to entry due to its diversification nature 
  • Investment vehicle for short and medium-term investment horizon.
  • Provide diversification benefits, especially in times of regional economic uncertainty

The disadvantages of ETFs in Mena 

  • Due to frequent trading 
  • High fees compared with traditional investment structures have to be considered speculative investments. 
  • It may not provide the same level of risk-adjusted returns as other more complicated forms of investment based on its passive nature. 
  • Lack of regulation leaves retail investors exposed to counterparty risk arising from market maker insolvencies.
  • The MENA region is an attractive market for ETFs due to its appetite for investments; however, some countries like Saudi Arabia don’t allow secondary market trading or shorting, which restricts some types of ETFs. It would make them less valuable than others where these activities are allowed.

“ETFs can be risky and must be considered speculative investments due to their frequent trading and generally short-term investment horizon.”

This statement is valid because ETFs are traded more often, thus exposing the investor to increased market risk. It can result in higher income yields or losses depending on how successful you are at timing the market. 

Another downside of ETFs is that they are passive vehicles. Unlike mutual funds, there’s no manager actively involved in running it, where managers actively make decisions that result in better returns over time even though the fees would be significantly higher. 

While this makes them attractive for short-term investors looking for diversification benefits, Mena Fund Managers believe active management is required to achieve long term superior returns than just buying into a local equity market and holding it over time.

In conclusion

“The MENA region is an attractive market for ETFs due to its appetite for investments; however, some countries like Saudi Arabia don’t allow secondary market trading or shorting, which restricts some types of ETFs.”

This statement is valid because certain secondary market activities such as short-selling and the use of derivatives are prohibited in certain countries, including Saudi Arabia, thus restricting the potential risks and benefits that can be gained from investing in specific funds. 

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