In 2010, NASDAQ 100 Shari’a index launched to little fanfare. As the world economy lurched through the global recession, the index failed to replicate the enthusiasm of the Dow Jones Islamic Index. However, two years on as the economy commences its revival, there is an opportunity for the NASDAQ OMX Shari’a index family to have the impact it desires. It’s an impact NASDAQ OMX’s Executive Vice President and Chief Marketing Officer, John L. Jacobs believes is more than possible. We caught up with Mr. Jacobs to discuss his opinions on the index and its potential to meet the needs of investors.
In 1983, an ambitious young man stepped into the offices of NASDAQ. His ambivalent emotions belied the enthusiastic smile he wore on his face. Inside, he was nervous but excited, worried but hopeful, inexperienced but committed to learning. He had just joined the world’s first electronic stock market in an age where computers had yet to be as ubiquitous and essential as it is in contemporary society. NASDAQ was to be a trailblazer and John L. Jacobs had become its newest recruit.
Now approaching two decades, Jacobs sits as the Executive Vice-President and Chief Marketing Officer. He could never have imagined the growth of NAS- DAQ (now NASDAQ OMX) and the success of his own career were synonymous. He has seen significant changes occur in the company that has been an integral part of his life and has presided over many of the expansive steps that NASDAQ has made. NASDAQ OMX has had to adapt to the constant evolutions of the market and the altering environment. Players enter the market, and
players leave. To remain in themarket, a company has to be relevant and adaptable. NASDAQ OMX is undoubtedly a company with its finger on the financial pulse; and so with the emergence of Islamic finance, NASDAQ OMX sees potential. For Jacobs, Islamic finance is a rapidly growing and increasingly important sector of the global economy but he fears that de- spite the tremendous growth, it remains underserved and still in need of greater global exposure. However, for Jacobs, the company he has served so loyally is uniquely qualified to further develop the Islamic financial sector. It is a bold ambition but very few could doubt Jacobs’ accomplished eye.
From NASDAQ to NASDAQ OMX on February 8th 1971, 12 years before John L. Jacobs began his fateful day, the National Association of Securities Dealers Automated Quotations (NASDAQ) commenced trading of over 2500 securities as part of the NASDAQ composite index. It was set up by the National Association of Security Dealers (NASD), a regulatory authority that had primary responsibility for oversight of brokers and brokerage firms. The NASDAQ exchange granted household names the platform from which to raise capital: Intel, Microsoft and Apple are indebted to the exchange. Recently, Facebook has joined this heady list of illustrious names for its IPO. Over the years, NAS-DAQ has accomplished many milestones. In 1997, NASDAQ was the first stock market to offer its listed companies a proprietary online service with company, peer and industry trading data called NASDAQ Online. Three years later NASDAQ’s membership voted to restructure and turn the exchange from a public company, owned by NASD, into a shareholder-owned, for-profit company. In 2006, NASDAQ completed its separation from the NASD and began to operate as a national security exchange.
In 2008, the NASDAQ OMX Group, Inc. was formed. It is a holding company created by the business combination of The NASDAQ Stock Market, Inc. and OMX AB. The NASDAQ Stock Market is the holding company’s U.S. equities stock exchange. The transformational combination of the two entities resulted in the expansion of NASDAQ business from a U.S.-based ex-change operator to a global exchange company offering technology that powers more than 70 exchanges, clearing organisations and central securities depositories in more than 50 countries.
Why financial institutions need indices Jacobs is proud of the growth of NASDAQ since he joined. The NASDAQ OMX Group is the world’s largest exchange company and owner and operator of 24 markets in the U.S. and Europe. NAS- DAQ OMX is the parent company of the NASDAQ Stock Market, the world’s first electronic exchange and the largest exchange in the U.S. NASDAQ OMX is also home to NASDAQ OMX Global Indexes — a premier full-service global index provider. NASDAQ OMX Global Indexes develops NASDAQ OMX branded indexes and licenses associated derivatives and financial products.
Indices are a barometer of market health, be it reflective of the broader economy or a specific sector – such as technologies. Indexes allow institutional and individual investors to track day-to-day changes as well as long-term trends in the economy and the financial markets. They are used as benchmarks, a standard by which economic sectors and investment portfolios are measured. They bring clarity to market participants and help them with investment decision-making.
NASDAQ OMX’s index creation process is driven by demand and developments in the global economy. Jacobs believes objectivity is crucial to the creation of a robust index. The perspective of the investor remains a cornerstone to the formulation and an investor has to be positive that the index is truly reflective of the general economy or segment. NASDAQ OMX adopts a methodology that looks at ways to measure segments or sectors of economic models in a fashion that is transparent and based on rules with an emphasis on investing trading and philosophy.
Due to great demand, NASDAQ OMX Global Indexes is one of the fastest growing indexers in the world. This year alone, they have created 450 new indexes and now have more than 3,000 diverse in- dexes covering equities, bonds and commodities. Their client base spans the entire spectrum of the financial services industry including big investment banks, portfolio managers pursuing passive investment strategies, commercial banks, and insurance companies located in the Americas, Europe and Asia. During 2011, NASDAQ OMX licensees reported issuing at least 8,500 structured products linked to NAS- DAQ OMX indexes with a notional value exceeding $1.4 trillion in 24 countries. NASDAQ OMX indexes are widely used as benchmarks by plan sponsors, financial institutions and individual investors. They also license their indexes to asset managers and financial entities that distribute a variety of financial instruments that closely track their indexes with the purpose of achieving investment results that generally correspond to the performance of their in- dexes, such as exchange-traded funds (ETFs), mutual funds, UITs, annuities and other portfolio-based products. Index options, futures, and other derivatives based on NASDAQ OMX indexes are available to institutional and individual investors to be used for risk management.
Edbiz NASDAQ OMX Shari’a indexes
It has only been recently that Jacobs gained acquaintance with Islamic finance though he must have looked with interest the creation of the Dow Jones Islamic Index in 1999. The launch was significant for the progress of Islamic finance in the Western world, announcing quite boldly that Islamic principles have a place in the Western-based
financial system. The creation of the index followed the USA Office of Comptroller of the Currency (OCC) 1997 issuance of directives which permitted murabaha and ijara structures in the USA. HSBC also entered the USA market to offer itsretail products. The horizon was bright for Islamic finance but following 9/11 there has been caution with launching Islamic finance initiatives. 10 years on, Jacobs opines that there are potentially favourable investment opportunities in Islamic finance among US-based investors. However, given his position as a senior representative of a global exchange company, he declines to predict future economic performance: a testament to ensuring NAS- DAQ OMX remains both objective and transparent. In part, the uncertainty resulting from the global credit crisis precludes any definitive predictions to be made.
Nevertheless, Jacobs feels that there is more demand for tools to accurately measure the performance of the Islamic financial sector. He wants to ensure that NASDAQ continues its position as a premier global index provider by delivering on its commitment to design and license innovative and relevant indexes that meet the evolving needs of investors and other market participants. The introduction of the Edbiz NASDAQ-100 Shari’a Index and the other indexes in NASDAQ OMX’s family of Shari’a indexes are examples of their ef- forts to facilitate investment opportunities in Islamic finance. The Edbiz NASDAQ OMX Shari’a Index family brings a new set of tools to those interested in measuring Islamic economic sectors and maintaining Islamic investment portfolios. They offer Shari’a-compliant solutions beyond the most basic Islamic equity funds. This index family is comprised of securities that meet the Shari’a requirements as prescribed by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) and adopted by NASDAQ OMX with the guidance of the Shari’a advisor, Edbiz Consulting Limited.
Jacobs feels that NASDAQ OMX will be able to benefit Islamic finance by its promotion of the Edbiz NASADQ OMX Shari’a indices. He is quite confident that NASDAQ OMX has the tools to create a Shari’a-compliant index which is attractive for its investors. He points out once again that, unlike other index providers, the NAS- DAQ OMX index creation process and methodology is completely objective, transparent and rules-based. This unique approach offers market participants an unbiased perspective of the Islamic financial sector. Additionally, as a global exchange company, Jacobs avers that NASDAQ OMX offers unparalleled market visibility and perspective, key values that most other indexers cannot provide.
The problem for Islamic finance, Jacobs argues, is a lack of awareness. Despite its rapid growth, many market participants are still learning about Islamic finance and Shari’a-compliant indexes. This can be mitigated by NASDAQ OMX. The global visibility that NASDAQ OMX offers by being a global exchange and a global brand is a perfect medium for Islamic finance. Leveraging off the NASDAQ OMX brand, as well as their innovative indexes will enable Shari’a-sensitive investors to expand the trading and investment landscape with new opportunities in ETFs, structured products, investments and Shari’a-compliant derivative securities.
Nevertheless, Jacobs is aware that it is not only awareness that needs to be tackled; competition remains a key consideration in structuring and promoting the Shari’a indexes. Maybe counter-intuitively, competition is not limited to dedicated index providers. NASDAQ OMX faces competition from investment banks, exchanges and developers who create financial products designed to meet investor needs. But such are perennial considerations of a financial market player. The interplay of micro and macroeconomic factors in the market requires constant monitoring and evaluation. The dynamism of the markets is what Jacobs thrives on. Being the Chief Marketing Officer, he is always looking for those opportunities to create the right profile, build profits and reduce opportunities for loss. The role is challenging but one that Jacobs finds exciting and fulfilling. Entering a new market such as Islamic finance brings its own set of complications and concerns, and embracing a fledgling market requires flashes of optimism.
Components of the Edbiz NASDAQ-100 Shari’a index
The Edbiz NASDAQ-100 Shari’a Index contains securities of the NASDAQ- 100 Index which are considered Shari’a-compliant. The NASDAQ-100 Index includes 100 of the largest domestic and international non-financial securities listed on the NASDAQ Stock Market based on market capitalization. Because the Edbiz NASDAQ-100 Shari’a Index is also a market cap-weighted index, the index securities generally enjoy large capital growth. Like the NASDAQ-100 Index, it reflects companies across major industry groups including computer hardware and software, telecommunications, retail/wholesale trade and biotechnology.
The indexes are used by those who are interested in tracking Islamic economic sectors and maintaining Islamic investment portfolios. Institutional and individual investors are interested, as are plan sponsors, asset managers and financial entities that distribute financial products such as exchange-traded funds (ETFs), options and other derivatives.
Target audience is those who are interested in tracking Shari’a-compliant non-financial large-cap growth stocks. Potential clients include professional and individual investors, plan sponsors, asset managers and financial entities that distribute financial products such as exchange-traded funds (ETFs), options and other derivatives.
Comparing the performance of NASDAQ OMX and Dow Jones Islamic Index
The Dow Jones Islamic Market US Index measures the US universe of investable equities that pass Dow Jones’ proprietary screens for Shari’a compliance. The selection universe for the DJIM US Index includes the components of the US benchmark index, which covers approximately 95% of the float-adjusted market capitalization of the underlying market.
The correlation between the Edbiz- NASDAQ-100 Shari’a TR Index and the Dow Jones Islamic Market US TR Index is 95.5%. As one would expect with a high correlation, both indexes have moved very much in tandem with one another over the past two years. Returns have been almost identical at 33.65% and 33.62% with NAS- DAQ edging out Dow Jones.
The future. Jacobs is optimistic about the Shari’a index. He is proud that NASDAQ OMX Global Indexes continuously seeks new opportunities to license indexes to asset managers and financial institutions worldwide. With a range of financial instruments such as ETFs, index mutual funds as well as options and futures contracts, market participants can develop a variety of strategies that help them meet their investment objectives. Jacobs asserts, rightfully, that the NASDAQ-100 Index is one of the most widely watched indexes in the world with almost $400 billion in global assets linked to it. With the Edbiz-NAS- DAQ-100 Shari’a Index, they are working diligently to replicate the success they have had in making the NASDAQ-100 Index one of the world’s most widely watched indexes. Jacobs is confident that this is an achievable aim. After nearly 20 years of success, it would be difficult to argue against him.
