Are exchange-traded funds effective instruments to invest in Islamic markets? Early evidence from Dow Jones DJIM Turkey ETF

Onur Gozbasi and Ekrem Erdem

American Journal of Finance and Accounting, 2010, vol. 2, issue 2, 119-142

Abstract: The purpose of this study is to evaluate the performance and pricing efficiency of the Dow Jones DJIM Turkey Exchange Traded Fund (DJIMTR), the world's first exchange-traded fund launched to track an Islamic market index. Using the daily data set, it is found that relative to its traditional index fund counterpart, DJIMTR tracks the benchmark index with a lower tracking error; thus reflecting the performance of the benchmark index more effectively. Our performance proxies, mean returns and risk adjusted returns, also demonstrate that DJIMTR outperforms its traditional index fund counterpart. In addition, as a result of various tests performed through VAR models, it is found that pricing deviation in the DJIMTR is of a temporary nature, meaning that 'the DJIMTR is efficiently priced'. In the regression model, the significant factors that explain transient premiums' size are identified as transaction cost, trading volume, intraday volatility and institutional ownership ratio. The results of the study are expected to provide new insights for founders who are planning to create mutual funds to track Islamic market indexes and to guide individual investors targeting Islamic indexes in their investment decisions.

Keywords: ETFs; exchange-traded funds; index funds; Islamic funds; Islamic market indexes; performance evaluation; Islamic finance; DJIMTR; pricing efficiency; transaction costs; trading volume; intraday volatility; institutional ownership ratio; investment decisions. (search for similar items in EconPapers)
Date: 2010
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