S&P DJI applies smart beta indexing to Middle East markets

Oct 27th, 2015 | By | Category: ETF and Index News

S&P Dow Jones Indices, one of the world’s leading providers of financial market indices, has expanded its smart beta index series with two new indices catering to the Middle East and North Africa markets.

S&P Dow Jones expands Shariah-compliant index series

The S&P Shariah Composite index analyses firm operations and financial ratios to ensure Shariah-compliance.

Alka Banerjee, Managing Director, Global Equity Indices, S&P Dow Jones Indices, commented: “We are excited to bring two new smart beta indices to the Middle East and North African region. The S&P Pan Arab High Dividend Low Volatility Index and S&P Pan Arab Composite Shariah Dividend Index have both been designed to serve as the basis for index-linked products (such as exchange-traded funds) or as benchmarks for active funds.”

The S&P Pan Arab Low Volatility High Dividend Index follows the highest dividend-yielding firms within the S&P Pan Arab Composite, while improving the risk profile of the index through diversification, volatility and tradability requirements. The methodology entails selecting the 75 stocks within the composite index that possess the highest trailing dividend yields, ranking them in ascending order according to their realised volatility over the previous 12 months, and selecting the 50 stocks with the lowest volatility scores to form the index.

The methodology applies country and sector constraints to minimise the possibility of over-concentration within the final index. These include a cap of 15 stocks per country (Saudi Arabia is granted an exception with 30 stocks permissible) and 15 stocks per sector as determined through the global industry classification standards.

The S&P Pan Arab Composite Shariah Dividend Index tracks the performance of the highest dividend yielding stocks within the S&P Pan Arab Composite Shariah. The methodology provides for further screening according to historic dividend growth as well as perceived dividend sustainability; the goal being to omit firms which may have temporarily raised their dividends above levels that are fundamentally sound for their business. The Index constituents are weighted by their indicated annual dividend yields.

Due to the rapid expansion of the Shariah financial industry over the past 30 years, providers are increasingly looking to develop more sophisticated solutions aimed at Islamic investors. The development of the S&P Pan Arab Composite Shariah Dividend Index marks another step in the maturing of these markets. “The new indices represent an important expansion of the S&P Pan Arab Indices as the region seeks more specialized indices. The Pan Arab market is dynamic and growing, and S&P Dow Jones Indices will continue to bring innovative indices to cater to the region’s needs,” said Banerjee.

The Composite index employs a screening process which eliminates companies that do not adhere to Shariah law. These include firms whose business operations involve alcohol, pork-related products and non-halal food, trading gold and silver as cash on a deferred basis, adult entertainment, tobacco, gambling, weapons manufacture, and conventional finance (non-Islamic).

Firms’ balance sheets are also placed under scrutiny with those whose financial ratios exceed a certain margin being eliminated. These thresholds include a maximum of debt to equity of 33%, a maximum accounts receivable to equity of 49%, and a maximum cash and equivalents to equity of 33%.

The S&P Pan Arab family of indices includes the following indices:

S&P GCC Investable

S&P GCC Composite

S&P Pan Arab Investable

S&P Pan Arab Composite

S&P Bahrain Domestic

S&P Kuwait Domestic

S&P Oman Domestic

S&P Qatar Domestic

S&P Saudi Arabia Domestic

&P UAE Domestic

These indices are also available in Shariah-compliant versions:

S&P GCC Investable Shariah

S&P GCC Composite Shariah

S&P Pan Arab Investable Shariah

S&P Pan Arab Composite Shariah

S&P Bahrain Domestic Shariah

S&P Kuwait Domestic Shariah

S&P Oman Domestic Shariah

S&P Qatar Domestic Shariah

S&P Saudi Arabia Domestic Shariah

S&P UAE Domestic Shariah

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