Starting next Saturday, the 10,000-rial investment units of Sepehr Khobregan Naft, a new exchange-traded fund, will be sold at Iran Fara Bourse or the over-the-counter market. This is the first hybrid ETF that offers its units for underwriting in the current Iranian year (started March 21).
The fund will be added to the small but growing list of ETFs in Iran and the eighth to trade in Iran Fara Bourse.
ETFs are portfolios of stocks that track a market–in this case the fund's money will be invested in a portfolio of stocks and bonds. Since ETFs involve low management costs and trade on exchanges, they can give foreign investors a cheap, convenient route into frontier markets.
ETFs are quite new in Iran. They started activity two years ago, but are growing in number. Their rise has come after equity market regulations were revised six years ago.
During a five-day underwriting period, a minimum of 10 and maximum of 2.5 million units can be purchased by each individual or entity, Bourse Press reported. But the maximum number of units that can be ordered at once by anyone is limited to 100,000.
From the 50-million investment units of the 500-billion-rial ($15 million at market exchange rate) fund, one million will be premium units, 80% of which will be owned by Mehr Ayandegan Financial Development Group and the rest by Khobregan Brokerage as the fund's founders.
Khobregan Brokerage also works as the ETF's manager. The market making is done by Sepehr Investment Bank, which is committed to trade at least half a million shares daily. Tadvin & Co. audit firm is the fund's auditor.
ETFs experience price changes throughout the day as they are bought and sold. Because they trade like stocks, an ETF does not have its net asset value (NAV) calculated every day like a mutual fund does. When buying and selling ETFs, you have to pay the same commission to your broker that you’d pay on any regular order.
Frontier Market
The sanctions, imposed on Iran over its nuclear program, have blocked most flows of foreign currency into the country, leaving Tehran Stock Exchange with an $84.6 billion capitalization at the market exchange rate. It offers one of the last big, unexploited opportunities for global portfolio investors.
While foreigners can invest in Iranian stocks, international sanctions hinder the process of transferring money and deter institutional funds, according to Charles Robertson, the London-based chief economist at Renaissance Capital Ltd.
In addition, domestic political and policy shifts, and speculative trading, have made the Iranian market very volatile. The market’s total return index soared about seven fold in the four years to January 2014 but has since tumbled 27.6% as authorities have tightened monetary and fiscal policy.
The index edged down 0.09% to 64,841.80 this Wednesday, TSE data show.
The smaller more diverse Iran Fara Bourse has fared better, mainly because of its more diversified nature, falling only 16.7% since January 2014. The market's index, IFX, rose 0.49% to 763.2 points this Wednesday.
Iran and world powers are negotiating to dissolve a 12-year nuclear dispute. They are expected to reach a final comprehensive agreement in one week or so, a deal that would lift sanctions against Iran in exchange for Tehran limiting parts of its nuclear energy program.
If a deal is reached, both equity markets are likely to jump and erase previous losses in the aftermath. Furthermore, foreign investors will start buying into Iran's 80-million-strong, highly educated, consumption-savvy market.
Professional investors are already scouring Iran for business deals and investment opportunities. The upsurge on foreign investment is what many Iranian money managers are preparing for and ETFs will prove to be attractive.
