ETFs listed and traded in Hong Kong allow investors to gain exposure to a wide variety of markets, sectors, and asset classes. In particular, Sukuk ETFs offer investors a means to participate in the Sukuk (commonly known as Islamic bond) market. Sukuk ETFs listed in Hong Kong are passive ETFs. Their investment objective is to track the performance of their respective underlying Sukuk indices.
In Islamic finance, Sukuks are common financial instruments that are either asset-backed or asset-based, representing ownership of certain assets consistent with the principles of Islamic law, known as Shariah. Shariah prohibits certain financial activities, such as receipt or payment of interests (known as Riba) and involvement in non-halal activities (known as Haram), such as dealing in alcohol and pork. To comply with Riba, unlike conventional bonds, Sukuks do not offer interest payments to their holders. Instead, holders are entitled to share the revenue generated and the capital appreciation of the Sukuk’s underlying assets.
Investors should note that a Sukuk ETF and its underlying Sukuk index may or may not be certified as Shariah-compliant by Shariah compliance advisers. For more details on Shariah-compliant investments, please refer to the article “Islamic Funds”.
Key risks of Sukuk ETFs
Before investing in a Sukuk ETF, investors should read the offering documents carefully and fully understand its features, underlying investments, operation and risks. It is important to understand some key risks of Sukuk ETFs in light of their exposure to Sukuks, as listed below.
1. Sukuks and fixed income instruments related risks
- Pricing of Sukuks is based on the value of and income generated by their underlying assets. As such, Sukuks are subject to specific risks including revocation of Shariah approval and other asset-related risks such as non-performance or seizure of underlying asset, which may adversely affect the value of the Sukuks.
- Sukuk issuer may fail to meet payment obligations under the Sukuk, and Sukuk holders may not be able to recover the principal, unlike holders of conventional bonds with contractual debt claims.
- Similar to bonds, Sukuks are also subject to certain risks associated with fixed income instruments, such as risks on credit / counterparty, interest rate, credit rating, credit rating downgrades, below investment grade / unrated instruments, sovereign debt, volatility and liquidity, and valuation.
2. Concentration and emerging market risks
Investments of Sukuk ETFs may be concentrated in certain Sukuk markets which are emerging markets. As such, Sukuk ETFs may be more susceptible to adverse economic, political, policy, foreign exchange, liquidity, tax, legal and regulatory risks in such markets, resulting in greater volatility.
