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.
Currency / FX
to trade in major currencies such as USD, EUR, GBP
currency only with associated FX requirements
trade, one ticket charge
equity trades with multiple ticket charges
throughout the European trading hours
while the local market is open
market in the ETF and underlying equity liquidity
be sold short like other developed market equities
difficult to borrow and sell short
market in futures and options
availability of derivatives
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
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”.
It is well known that certain
asset classes such as frontier and emerging market equities are difficult to
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.
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
Therefore, investors can gain
exposure to the performance of an index using over-the-counter options and
futures on ETFs.
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
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
- 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
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
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
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.