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Index Fund But Trades Like a Common Stock on a Stock Exchange

Index Fund But Trades Like a Common Stock on a Stock Exchange

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). 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

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 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.

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