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iBoxx Tadawul SAR Government Sukuk Index Series


Saudi Stock Exchange (Tadawul) in collaboration with a world leader in critical information, analytics and solutions IHS Markit, developed iBoxx Tadawul SAR Government Sukuk Index Series.

iBoxx Tadawul SAR Government Sukuk Index Series provides transparency to Saudi local currency Saudi Government Sukuk market performance. As part of the primary tools of active and passive investment managers, these indices can be used by dealer banks, ETF issuers, buy-side investment firms and third-party vendors to benchmark portfolio performance and risk. ETFs linked to iBoxx Tadawul SAR Government Sukuk Index Series indices can provide a transparent, cost effective way to gain exposure to different SAR Saudi Government Sukuk market. Instead of purchasing multiple Sukuks, investors can purchase a single ETF units which trades actively on an exchange. iBoxx Tadawul SAR Government Sukuk Index Series rules-based methodology are publicly disclosed and designed to be replicable.

Today’s Fixed Income Market

The fixed income market is the largest securities market in the world. It far surpasses the more popular equities market, and fixed income securities play a vital role in the functioning of the global financial system. Fixed income securities link lenders (investors) with borrowers.

What is an index?

An index is defined as a statistical measure, typically of a price or quantity, calculated from a representative set of underlying data.

Most commonly known for its role as a benchmark, an index can be described as the standard against which the performance of a financial instrument can be measured. In this role, an index provides a way to measure the performance of a specific segment of a financial market, i.e. comparisons within a region, industry sector or other asset classes.

A Fixed income index is used to measure the value of a section of the fixed income market. It can be defined by specific characteristics such as maturity or credit rating to capture a narrower slice of the market. For example, iBoxx Tadawul SAR Government Sukuk Index measures the performance on Saudi SAR Government Sukuk market.

How are indices used?

As a measure of performance, investors, central banks and regulators use indices to gauge market developments.

Aside from acting as a barometer of market temperament, indices also play a significant role in both active and passive fund management strategies.

An actively managed fund (one that seeks to outperform the market) will use an index as a benchmark to measure performance. Passively managed funds, also known as “passive indexing” or “index tracking” funds, use indices to track a specific market (or asset class) as closely as possible in a bid to replicate the performance of the index.

Fixed income complexities

The complex nature of the fixed income markets made the emergence and initial adoption of the fixed income index much more gradual than its equity index cousin.

Sukuk & Bonds can vary in many ways, including asset class, type (government, corporate or sovereign), tenor and coupon rates. Equities are limited to two lines of stock such as ordinary and preference shares, yet there can be multiple sukuks & bonds for every issuer of debt. Sukuk & Bonds usually trade less frequently than shares, and less trades can amount to a lack of liquidity in the bond market. All of these factors contribute to reduced transparency of the asset class.

The Role Of Fixed Income Indices

Fixed Income indices provide a way to overcome the complexities of the sukuk & bond market.

Investing in an index fund that tracks a fixed income index removes the challenge of having to select individual sukuks & bonds. Fixed income indices provide broad exposure to segments of the sukuk & bond market (taking into account the range of sukuk & bond characteristics).

For instance, a fixed income index can offer investors an opportunity to invest in multiple sukuk & bonds in a single instrument. Fixed income indices also allow for greater risk control by affording investors the ability to tailor their potential exposure to risk.

Index creators and their users

It’s the role of an index provider to create a fixed income index that is an accurate reflection of an asset class and therefore meets the needs of its users. A manager of an index tracking fund or an active investor using an index for benchmarking purposes will choose an index that best fits their objectives. Then index will be used as a benchmark for funds or ETFs.

Sukuk & Bond Pricing Sources

As fixed income market by nature is less liquid than equity and some of sukuks & bonds can have minimum or no trades therefore independent fair value pricing is needed to price each security. In such cases the prices for individual constituents, used to calculate an index, are often provided by an independent data source provider to index calculator. For instance, iBoxx Tadawul SAR Government Sukuk index calculations are based on multi-sourced pricing which, takes into account a variety of data inputs such as transaction data, quotes from primary dealers and other observable data points. Then, all prices are analyzed and using mathematical models independent fair value price for each bond is derived by IHS Markit.

Data integrity is critical to an index and investors need to know that prices are consistent and reliable. Using multi-sourced data can help to ensure accurate pricing resulting in accurate indices. Additionally, an investor should be able to question and challenge the underlying data, as is the case with independent providers. For example, in case of iBoxx Tadawul SAR Government Sukuk Indices prices are provided by Tadawul, which includes traded prices and daily primary dealer quotes, then IHS Markit calculates independent fair value prices for all bonds including those that never been traded or quoted. Using those prices iBoxx Tadawul SAR Government Sukuk Indices are calculated.

Importance of Index Rules

The rules governing the construction of an index can be found in index guides and the detail behind index calculation is clearly displayed in methodology documents. This type of documentation is easily accessible, posted on Tadawul’s and IHS Markit websites. This level of transparency allows an investor to understand the makeup of an index.

For more details on the iBoxx Tadawul SAR Government Sukuk Index Series Calculation and Sukuk Selection Criteria, please refer to the Index Methodology .

For summarized information on the iBoxx Tadawul SAR Government Sukuk Index Series, please refer to the Index Factsheet.

To view iBoxx Tadawul SAR Government Sukuk Index Series Daily End of Day Index Levels please refer to Index Info Page.

To view iBoxx Tadawul SAR Government Sukuk Index Series Analytics Report, please refer to Monthly Index Analytics Report.

To view iBoxx Tadawul SAR Government Sukuk Index Series FAQ, please refer to FAQ page.

Glossary:

Date

The actual pricing date based when the index is calculated.

Cpi

Clean Price Index Level (accrued interest in not added to prices of the bonds)

Tri

Total Return Index level (accrued interest is added on prices of the bonds)

Accrued Interest

The interest that is owed, but not yet paid, added to the price of the bond.

Day Count Method

The date count convention based on which the accrued interest is calculated,

it determines the number of days between two coupon payments.

Typical conventions are 30/360, Act/Act, Act/360, etc

Coupon

Bond coupons are normally described in terms of the coupon rate,

which is calculated by adding the total amount of coupons paid per year and

dividing by the bond's face value.

Coupon Frequency

The number of times you receive interest payments on a bond per year.

Coupon Payment

A periodic interest payment that the bondholder receives during

the time between when the bond is issued and when it matures.

Final Maturity

The final maturity of the bond which refers to the date that the bond matures.

Time To Maturity

Time indicated in years to maturity of bond.

Bid Price

The bid price of the bond at the close of the specific fixing of the market.

Ask Price

The ask price of the bond at the close of the specific fixing of the market

Bid_Ask_Spread

The difference in price of a bond between the bid and the ask at the close

of the specific fixing of the market.

Annual Bond Yield

The annual yield of a bond is the normalized representation of the

bond return based on a compounding period of one year.

Annual Index Yield

Weighted average annual yield of all constituent bonds in the specific index.

Annual yield of a bond is the normalized representation of the bond return

based on a compounding period of one year.