FTSE launches low-volatility Shariah index

Oct 29th, 2013 | By | Category: ETF and Index News

FTSE has enhanced its offering aimed at Islamic investors with the launch of a low-volatility, developed-market equity index incorporating Shariah-based ethical and financial screening.

FTSE launches low volatility Shariah index

The FTSE Shariah Developed Minimum Variance Index offers Islamic investors access to a low-volatility equity strategy.

A first in Shariah finance, the newly launched FTSE Shariah Developed Minimum Variance Index combines Shariah investment principles with advanced risk management techniques and is suitable both as a benchmark for actively managed funds and as an underlying for index-linked investment products such as exchange-traded funds (ETFs).

The methodology behind the index targets a balanced index risk profile by overweighting stocks that reduce index volatility and underweighting stocks that increase index volatility, while adhering to strict Shariah guidelines.

The contemporary Shariah banking and finance industry has grown rapidly over the last 30 years and now comprises over $1 trillion dollars of assets under management. As the industry matures, there is a increasing demand for Shariah-compliant solutions that offer a greater degree of sophistication – the FTSE Shariah Developed Minimum Variance Index typifies this.

As with other FTSE Shariah indices, the index methodology incorporates various screens, developed by Yassar Ltd, an independent consultancy and leading authority on Shariah, to ensure compliance with Shariah law. These include business screens, in which companies involved in ineligible activities are excluded, and financial screens, where companies in breach of certain debt, interest and income ratios are excluded.

As defined by Yassar, non-compliant companies are those involved in any of the following activities: conventional finance (non-Islamic banking, finance, insurance etc), alcohol, pork-related products and non-halal food production, packaging and processing or any other activity related to pork and non-halal food,  entertainment (casinos, gambling and pornography),  tobacco, weapons, arms and defence manufacturing.

Companies permissible under the business activity test must them comply with a series of balance sheet and income statement screens. Once again defined by Yassar, these include: debt less than 33.333% of total assets; cash and interest-bearing items less than 33.333% of total assets; accounts receivable and cash less than 50% of total assets; and total interest and income from non-compliant activities not exceeding 5% of total revenue.

Companies that successfully pass through both the business and financial screening provide the universe for the index. The securities that make up the end index are those that minimize historical variance while maintaining a broad index diversified across country, industry and stock levels.

Commenting on the launch, Kevin Bourne, Managing Director, Environmental, Social and Governance (ESG), FTSE Group, said: “We are delighted to be able to launch our new suite of Shariah-compliant indices, which reflect the growing demand from investors for best-in-class benchmarking tools. The new index series adopts a conservative approach to Shariah-compliance, combined with a quantitative methodology that targets lower risk and is better aligned with Shariah principles. Working in partnership with Yassar Ltd, the new index series has been fully certified as Shariah compliant and builds on FTSE’s portfolio of innovative, alternatively-weighted indices.”

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