Economy, Business And Markets

Behind ETFs

Behind ETFs Behind ETFs

A  Tehran based investment firm in January announced that it has created Iran’s first exchange-traded fund or ETF specifically for international investors, excluding the US.

The investment firm, Turquoise Partners, is behind the ETF that shadows the Tehran Stock Exchange’s TSE 30 index, comprising 30 largest publicly traded Iranian companies.

“Our aim is to create different types of investment instruments for a variety of investor appetites,” Ramin Rabii, CEO of Turquoise Partners, said in a statement to Reuters, adding that “there has always been a demand from local and foreign investors to trade the Iranian market index which we tried to address with this fund.”

TSE’s top 30 companies are made up mostly of oil and petrochemical companies, gas and oil companies, and major industrial companies like Iran Khodro, an automaker.

The target audience of the ETF is largely Iranian expatriates as well as Middle Eastern and Central Asian investors.  

The Financial Tribune interviewed the company tasked with creating the Turquoise 30 index, Tadbir-Pardiz IT Group to find out more. In the interview with Ahmad Araghchi, the group’s CEO, was asked about ETFs in general and their possible impact on the TSE in the next few years.

Financial Tribune: What is an ETF?

Ahmad Araghchi: An ETF is a financial instrument (managed funds) which gives confidence to investors through their structure and nature.  They are an entirely new type of investment vehicle which our company has created from the ground up.

What do ETFs do?

ETFs build confidence in the overall market. ETFs are [also] getting more popular in the world, with the US, Germany and the UK using them as investment vehicles. They are also becoming popular in emerging markets, like for example BRIC countries (Brazil, Russia, India and China).

 Beijing has especially taken up the cause of the ETFs and become avid users of this type of investment vehicle. When foreign investors want to come to market they don’t know the market, they don’t know the structure of the market, nor do they possess much information on how our market works. Instruments like ETFs allow foreign investors to enter the market and through our services we can help them.

The ETF you created for Turquoise Partners follows the TEDPIX top 30 companies.

One and half years ago, around September 2013, the first ETF within Iran was created by our engineers. We created software front and back end and built the user interface. It was a kind of revolution in our market and another kind of revolution in our financial technologies. Before the ETF we only had mutual funds, I’m talking in regards with back end technology side. We had mutual funds, and we created the software for mutual funds.

With mutual funds you have to disseminate the information and calculate the information on a day-by-day basis. You also need to arrange with a regulator. However with ETFs, being online is crucial, each two minutes you calculate the NAB, you have do all calculations and publish it to the TSE. Each two minutes the ETF closes and restarts again making it the most dynamic market within Iran. Imagine each two minutes is like a year.  

The first ETF we created was for Iran Farabourse (Over-the-Counter market). The new one released in the past few weeks was released for the top 30 performing companies at the TSE, orr as they’re known, blue chip companies.

How do you think offering an ETF will help the market in general?

With the opening of this ETF, I expect that we’ll expand our presence in the market in general and raise our profile from a behind the scenes company. The benefit in this new liberalization of the market means that you can give an opportunity to retail investors – which in turn helps the performance and safety of the market in general. With the ETF, retail investors can now track the market; previously the complexity of the market wouldn’t allow this.

Another fact, in our market indexes are far away from each portfolio manager. And it reduces the risk of investment. And it also helps have professional asset management in the fund

What percentage of international investors will buy the ETF?

It’s a very difficult question to answer considering the [ongoing] sanctions placed on Iran. But I’m sure if everything becomes normal [sanctions relief] and foreign investors want to come to invest in Iran, they will definitely buy ETFs and indices. I think if this situation were to occur, Index ETFs would be the first choice of foreign investors, then moving on to the main stock exchange.

What do you think will be the returns on the Turquoise 30 Funds?

Obviously it depends on the overall situation of the market, and the general state of things currently in regards to the nuclear negotiations. I do believe however in the long term funds like the Turquoise will give higher returns than regular bank checking accounts.

Do you think sanctions will affect the performance of ETFs, both for local and international investors?

The economic situation of the country is tentative, and definitely, we’re not going to have a rush of foreigners bringing their investments if a deal were to occur soon. The current situation throughout many markets including real-estate is slow, so it’s going to take some time for these new services to get going. In the end local investors are becoming more interested in this market.

Do you believe more companies will purchase more ETFs from you?

Yes in fact, we have another two companies currently in the line for ETFs. The next new ETF is likely to come online in the next few days, the other one will come online next [Persian] year (starting March 21).

Are there any technical aspects we should know?

Our ETF engine is connected to the TSE directly through an online service called HUB. It collects the information of the NAB through the hub. It calculates every two minutes through the hub. Then it also gets the thread execution messages through the main hub database and on to traders’ desktops.

How many clients can go on this new ETF ?

The Securities and Exchange Organization put a ceiling on ETFs. I believe it was 500 billion rials and 10 trillion rials for each specific ETF. There is no limitation for buying units of ETFs; so local and foreign investors have the ability to buy shares in bulk if they so wished.

We are also working with CSDI (Central Securities Depositories) that oversees the running of this market. This is the first time we could get all the players in the market and get them to work together; so we could offer the ETFs in real time for portfolio managers. The regulator also has complete access to the entirety of the market to add another level of transparency to trade.