BlackRock has introduced a new fixed income ETF in Europe offering targeted exposure to Sukuk bonds from emerging market issuers.
Sukuk bond ETFs are specifically tailored for Islamic faith-based investors.
The iShares $ Sukuk UCITS ETF (SKUK NA) has been listed on Euronext Amsterdam with an expense ratio of 0.40%.
Sukuk bonds are bonds that conform to Islamic finance laws that prohibit interest. Unlike conventional bonds where the issuer has a contractual obligation to pay bondholders on specified dates, Sukuk bonds entitle holders to a share of ownership, and therefore revenues, of the underlying assets.
Methodology
The fund tracks the JP Morgan EM Aggregate Sukuk Index which encompasses a diverse array of liquid, US dollar-denominated Sukuk bonds. Eligible instruments include those issued by a broad range of entities based in emerging markets, including sovereign, quasi-sovereign, corporate, and supranational issuers.
The index considers various types of bonds for inclusion such as fixed-rate, floating, and zero-coupon bonds, alongside capitalization/amortizing bonds, and those featuring callable or puttable options. However, it excludes Contingent Convertible (CoCo) securities.
Eligibility for inclusion in the index spans across investment-grade, high-yield, and unrated securities, provided they have a minimum face amount outstanding of $500 million. The index focuses on bonds with at least 2.5 years remaining until maturity, phasing them out once they fall below one year to maturity.
A bond must be classified as Sukuk as determined by the standards set forth by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI).
The index is weighted by market value subject to a cap of 8% on any single issuer and an aggregate cap of 36% on all issuers with individual weights above 4.5%. Rebalancing occurs every month.
As of 18 January, the ETF contained 112 issues and was exhibiting a yield-to-maturity of 5.17% with an effective duration of 3.93 years.
Saudi Arabia and the UAE each accounted for approximately a quarter of the ETF’s weight with the next-largest country exposures being Turkey (8.3%), and Indonesia (7.8%).
Over a third (36.4%) of the index was dedicated to bonds with a credit rating of A with the next-largest credit bucket exposures being BBB (19.4%), B (16.7%), BB (11.0%), and AAA (8.0%).
The fund represents the second dedicated Sukuk bond ETF in Europe following the September 2023 launch of the HSBC Global Sukuk UCITS ETF (HBKU LN). This fund, which comes with an expense ratio of 0.70%, covers fixed-rate, US dollar-denominated, investment-grade-rated Sukuk bonds issued worldwide.