A first for Central Asia: ETF launched based on ITSW index

ITSW is Central Asia’s first index ETF with Kazakhstani companies
Amir Temirbulat

Alexander Dyakovsky, ITS’s Managing Director, discusses ETFs, their role in Kazakhstan’s financial market and plans to launch new instruments.

You recently launched an ETF based on your ITS World index. Could you please tell us more about the new instrument?

— I wouldn’t reduce what happened in Kazakhstan’s market on 7 November 2024 to merely the launch of another financial instrument. It was something much bigger than that! ETFs are arguably the most significant technological breakthrough in the financial industry in a century. They have revolutionised the way people around the world think about who has access to top-tier management for their savings, how those savings can be managed in the modern world, how people save in general and what happens to their money downstream in the economy.

By 2024, there were over 11,000 ETFs around the world, managing more than $14 trillion in investor funds. I don’t think it would be a mistake to say that ETFs are the most popular form of investment in the world for the vast majority of investors today.

However, there was still a huge gap on the global ETF map. Simply put, there were no ETFs throughout the entire former Soviet Union, including, of course, Central Asia and the Caucasus. So, on 7 November 2024, when the ETF index fund for our flagship index, ITS World, began trading, this gap became much smaller. The fund was given the ticker symbol ITSW. And ITSW became the first ETF not only in Kazakhstan’s financial market but also in a huge region that is home to some 100 million people.

That really is a big market, but why did you choose Kazakhstan to start with?

— As an instrument, ETFs are an extremely simple story – especially index funds. They are a basket of securities packaged in a convenient tradable instrument, ETF shares. This doesn’t seem complicated, but getting this simple story to play out takes the efforts of a huge number of people as well as the institutions behind them. The first thing you need is a convenient effective jurisdiction. And then you need a regulator interested in creating a regulatory framework for the creation and development of complex products, such as ETFs. We’re lucky: we have such a jurisdiction in Kazakhstan, the Astana International Financial Centre (AIFC), and we have such a regulator, the AFSA (the Astana Financial Services Authority).

Could you please tell us more about ETFs. What makes ETFs different from other investment instruments?

— As I said, in short, an ETF is a basket that combines various assets, such as stocks, bonds or even commodities, but the ETF itself is traded on an exchange like an ordinary stock. People have long known that it’s very important in investing not to put all your eggs in one basket. But the technologies needed to create these instruments appeared only around 30 years ago, and this principle was actualised in a truly transparent, simple, convenient, reliable and accessible way. As a result, entire industries in traditional investing were incorporated into ETF shares. They are popular both among novice investors who are just taking their first steps in the market and among asset managers responsible for billions of dollars and with a proven track record working with assets in pension and other funds over decades.

Getting back to ITSW shares, I would like to say that they can be traded by all types of investors, both retail and institutional. ITSW shares are denominated in US dollars, which is important for those seeking foreign currency returns but who are unwilling to settle for low deposit rates. When purchasing shares of the fund for only $10, investors acquire an equal share in a basket of securities made up of 50 of the largest international companies that are leaders in their regions and industries. To build this kind of portfolio independently, investors would need hundreds of thousand dollars. In addition, building such a portfolio requires in-depth knowledge of the market, time for analysis and decision-making, as well as constant monitoring of their investments. All this is simplified down to the click of a button: “buy” or “sell”. At the same time, management fees drop to 0.2% of the value of net assets per year, which is also several times, if not an order of magnitude, lower than for other types of pooled investments. The fund is run by mathematics, not a manager. And this, obviously, is much cheaper for investors.

Which securities are included in this first ETF?

— The purpose of any passive fund, which includes ITSW, is to use the same mathematical formulas that are used in the index. The ITS World index includes the biggest names, undisputed leaders in their regions and industries, such as Alibaba.com, Apple, AstraZeneca, Microsoft, Nvidia, SAP and Toyota, in addition to the Kazakhstani companies Kaspi and KazMunayGas, which investors in Central Asia are very familiar with. Backtesting has shown that it can beat comparable international indexes in various regions around the world, such as the Hang Seng or the S&P 500.

In essence, ITSW is an opportunity to buy the “best of all worlds” with just one click. In addition to the fact that the fund makes the threshold for entry into the global market as low as it has ever been, its liquidity is practically endless. After all, it’s driven not only by market makers but also by the substantial trading volumes and narrow spreads of the shares that are included in the fund’s basket, which are traded in the biggest financial centres around the world.

How successful was the launch of the new instrument?

— We are very pleased with the first results. You can judge for yourself. On the first day of trading, the new instrument’s trading volume exceeded $620,000. That is around 12% of the value of the fund’s assets. We were betting precisely on this kind of trading volume when we discussed the concept for the instrument with IPS Capital, which manages ITSW. Liquidity is of fundamental importance to us, since our returns are based mainly on trading volume.

In the first days, more than five hundred private investors bought shares for their portfolios, including the first international investors — from Armenia. Many investors who bought ITSW shares have already received a decent return from the rally that followed the presidential election in the United States, as the price of ITSW shares rose from $10.00 to $10.30. Now there’s been a price correction, however, and I think this is also an extremely important experience for new investors, as it shows that the price of ETF shares, like any securities, can both rise and fall.

Why did you decide that now was the right time to introduce ETFs to the market in Kazakhstan?

— I think you’ve answered your own question. It was simply the right time to develop ETFs throughout Central Asia and the Caucasus, on both the supply side and the demand side.

On the supply side, the emergence of this highly advanced class of financial instruments requires the right conditions, including regulation, modern infrastructure for securities accounting and custody, interest on the part of financial institutions and private investors, and electronic banking technologies. Under the hood of this simple technology for investors – just like under the hood of a modern automobile – there are hundreds of complex technological solutions and a great deal of work by a variety of specialists.

On the demand side, a growing interest in investing among the population of Kazakhstan, especially after recent IPOs, also played an important role in shaping the conditions for the start of trading in ITSW shares. Many have brokerage accounts, and their financial literacy and understanding of how financial markets work are improving. Kazakhstani investors are no longer novices: they are actively looking for ways to diversify their portfolios, and ETFs provide just such an opportunity.

It is also important that access to financial technologies and online banking has already become widespread. Demographics play a role: young people are particularly receptive to new opportunities.

I think that, in the end, as in America, South-East Asia and Europe, for many people in Central Asia who do not have experience in investment markets, ETFs will become the main financial instrument for young people and generally their first investment instrument. In my opinion, this is the best choice thanks to their reliability, liquidity, affordability and diversification.

And how will the addition of ETFs affect the country’s market? How will this affect other assets in Kazakhstan’s financial system?

— The ETF market around the world has a direct and positive impact on the development of the financial industry. I don’t think it would be a mistake to say that, with the advent of ITSW in Kazakhstan, a large number of new funds will appear, and trading activity on the part of both domestic and international investors will increase. We hope that this will help increase liquidity in the financial markets of Central Asia and the Caucasus and that it will be an important driver for their development. An important and much more achievable goal will be Kazakhstan’s recognition as an attractive global emerging market.

The growth of the financial market, in turn, will increase investor interest in all securities available in Kazakhstan, including domestic ones. When ITSW was first launched, investors spent $5 million, $200,000 of which went to securities of Kazakhstani issuers. As the industry grows, this trend will only be reinforced, which means that it will attract new issuers to the market and facilitate successful IPOs on the part of domestic companies.

Would you like to share your plans for new funds?

— Following the start of trading in ITSW, our partner, IPS Capital, announced plans to launch 15–20 more funds. The next launch will be a unique ETF for a traditionally Muslim region, based on global securities and created in accordance with Shariah law. There are several funds like this in the United States, but there simply are no such instruments in Central Asia. I think Muslim investors will appreciate this opportunity.

However, no one intends to create funds simply for the sake of creating funds or indexes for the sake of indexes. We respond to requests from management companies, and we are negotiating with a number of market players, including from neighbouring countries, who have shown a great deal of interest in ETFs. In support of the first ETFs based on our indexes, ITS initiated a marketing programme that pays brokerage partners an annual agency fee of 0.5%, which is a completely new strategy for trading platforms.

How do you see the AIFC’s prospects as a jurisdiction in terms of this new market?

— According to our calculations, the market for pooled investments in the region could grow in the coming years by 10x–30x in terms of assets under management. I am confident that a significant portion of this potential will take the form of ETFs. And I believe that the Astana International Financial Centre has a great chance to become the main hub for the ETF industry in Central Asia and the Caucasus.

In its time, Dublin followed this same path. Ireland’s capital, once far from being the most obvious jurisdiction for global investors, has become a huge centre for the ETF industry in Europe, where funds worth over a trillion euros have been created. Why couldn’t Astana become such a hub for its region?

A journey of a thousand miles begins with a single step. We are confident that, for the ETF market in Central Asia and the Caucasus, this first step was taken here, in the capital of the Republic of Kazakhstan, with the launch of ITSW, the first ETF in the region.

This is not investment advice. Any investments made by readers are made at their own risk.