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Benefits of the ETF Structure | KUW8

In this paper we discuss some of the uses of ETFs which set them apart from investing directly in equities in the local market.  We will look at trading flexibility; cash equitization; liquidity; stock lending; shorting (long and short trading strategies); derivatives and structured products (including capital protected) on ETFs; and other benefits.

 

ETFs

Local Equities
Trading Currency / FX Options to trade in major currencies such as USD, EUR, GBP Local currency only with associated FX requirements
Ticket Charges One trade, one ticket charge Multiple equity trades with multiple ticket charges
Trading hours Available throughout the European trading hours Only while the local market is open
Liquidity Secondary market in the ETF and underlying equity liquidity Underlying liquidity only
Short Selling Can be sold short like other developed market equities Often difficult to borrow and sell short
Derivative Healthy market in futures and options Limited availability of derivatives


Trading Flexibility

There are multiple benefits when it comes to trading ETFs vs local equities.  The key is to discuss your needs with the Issuer’s Capital Markets team to understand all of the benefits and options available to you, however here are some of the highlights:

  • The ETF can be traded like one share, offering easier execution than a portfolio of stocks, but with the same diversification benefits;
  • The ETF can be traded on multiple stock exchanges (London Stock Exchange, Deustche Boerse, Borsa Italiana) and via multiple platforms, Authorised Participants and market makers.  At HANetf we have a wide range of brokers and market makers – see full list in the appendix;
  • Execution can be at Net Asset Value much like a mutual fund (the ETF is executed relative to the NAV which is normally based off the closing level of the underlying assets); or at a risk price, where the ETF is executed at a single point in time normally against a market maker (for example by placing limit orders);
  • The ETF can be traded in USD, EUR and GBP
  • ETF units can be held and traded anonymously, providing investors with the flexibility to buy or sell small and large amounts quickly and discreetly at a low cost. You have the possibility to trade more cheaply than direct equities or a managed fund through a combination of inventory, trading axes and competitive market-making by the world’s leading ETF traders.
  • Please remember that when you trade ETFs your capital is at risk.


Extended Trading Hours

Extended trading hours are available to investors, including Fridays and daily after the market close on Boursa Kuwait, due to the ability to access the ETF on European exchanges.

Whereas, local Kuwait equities are only traded during the Boursa Kuwait trading hours of 9am to 12:30pm local time, Sunday through Thursday.

ETFs trade throughout market hours of the exchange on which they are listed and these hours are not linked to the local market opening times.  In the case of the KMEFIC FTSE Kuwait Equity UCITS ETF, as it is listed on the London, Frankfurt and Milan exchanges, this means trading from 8am until 4:35pm London time, Monday through Friday.

As a result, by having the Kuwait ETF as part of your portfolio you have the ability to trade from 9am until 7:30pm local time from Sunday though Friday.  This adds an extra day to the trading calendar (Friday) and an extra 6 hours of trading Monday through Thursday.  This is a tremendous advantage allowing investors to implement strategies.


Liquidity

Unlike local equities, ETFs have the ability to draw on two sources of liquidity - the liquidity of the secondary market where they trade on multiple exchanges across Europe, as well as the underlying liquidity of the market/asset being tracked.  This underlying liquidly is accessed through the creation and redemption process in the ETF which is discussed in more detail in our paper “Understanding the True Liquidity of ETFs”. 


Short Selling

It is well known that certain asset classes such as frontier and emerging market equities are difficult to short.

However, ETFs allow investors to implement positive or negative strategies on a market such as Kuwait.  ETFs can be sold short like other equities.  An investor wanting to go short the Kuwait market is able to borrow the Kuwait ETF and sell short.


Derivatives

There exists a fairly healthy market in futures and options built on ETFs.  Derivatives in the ETF market operate in the same way as derivatives on single stocks.

Therefore, investors can gain exposure to the performance of an index using over-the-counter options and futures on ETFs.  


Stock Lending

Lending securities is a reasonably well-known source of additional revenues, however what is less well known is that ETFs can also be lent via a lending agent.

If there are short sellers in the market (for instance hedge funds), they will be looking for ways to implement this strategy and the simplest way may be to short the ETF rather than shorting individual stocks (which may or may not be possible).  The Kuwait ETF holds a diversified index of stocks as defined by FTSE and so by definition, shorting this ETF gives you a more effective way to implement that strategy.

The lending of ETFs may offset some of the costs of ownership of the ETF (e.g. the management fee).  The revenues which can be earned from lending ETFs is simply driven by supply and demand.  In the case of Kuwait there are currently only two ETFs to choose from and so supply of ETF shares which can be lent out is limited, supporting higher securities-lending premiums.


The opportunity for Kuwait

We believe that the participation of local institutional investors in this ETF will encourage overseas investors to invest alongside them and raise the profile of Kuwait as an investment destination and help develop Kuwait’s capital markets and stock market liquidity.


Other Benefits

  • There are no derivatives embedded and there is no leverage in the fund
  • The ETF is UCITS-compliant, meeting the highest standards of European regulations governing concentration, diversification and liquidity limits
  • You get daily disclosure of the underlying equities (full transparency)
  • No stamp duty or withholding tax is payable
  • ETF trades are more visible than local market trades. The almost $5bn AUM flow into Saudi ETFs in 2018/9 acted as momentum to bring more investors to the trade


About KMEFIC

KMEFIC (Kuwait & Middle East Financial Investment Company) is a leading asset management and financial services company in the Middle East providing innovative investment products and services, consistently producing strong returns and increasing shareholder value. KMEFIC was incorporated in January 1984 by The Bank of Kuwait and the Middle East (currently Ahli United Bank) and The Public Institution for Social Security-Kuwait, as equal shareholders. In 1987, The Public Institution for Social Security, Kuwait sold its stake to The Bank of Kuwait and the Middle East (currently Ahli United Bank) to become the main shareholder in KMEFIC. KMEFIC was listed on the Kuwait Stock Exchange in July 1997. www.kmefic.com.kw

 

 

 

 

 

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