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Saudi Arabia: Analysing the Kingdom’s ETF market
21 July 2026
With exchange traded funds becoming increasingly important in the securities lending market, Carmella Haswell explores this landscape in the Middle East following the selection of Saudi Arabia’s first market maker for ETFs
Image: stock.adobe.com/rehan
The Kingdom of Saudi Arabia is 10 years into its Vision 2030 roadmap, which aims to shape the future of its financial sector to promote income diversification, boost savings, and offer various financing and investment opportunities. Complementing this mission is the increasing investment in exchange traded funds (ETFs).
In May 2026, SAB Invest, the investment arm of Saudi Awwal Bank (SAB), announced its official registration by the Saudi Exchange (Tadawul) as the first ETF market maker in the Kingdom. This achievement marked a new era for the country’s capital market, according to the firm, supporting Vision 2030’s Financial Sector Development Program and delivering tangible benefits to investors through improved ETF trading efficiency.
According to EquiLend Data & Analytics, since SAB Invest’s market making activities began on 18 May 2026, securities lending balances for Saudi Arabia-listed equities have risen by 2.4 per cent to US$1.3 billion.
Further, inventory levels increased by 3.4 per cent to US$24.5 billion, and average fees have dropped by 2.2 per cent to 424 basis points.
The importance of securities lending liquidity for market makers is essential to borrow and hedge efficiently, states EquiLend, and since the beginning of the year, inventory has increased by 157 per cent to US$24.5 billion with new participants expanding into the Kingdom’s emerging lending market.
Speaking with Securities Finance Times, Majed Alqahtani, chief brokerage officer at SAB Invest, says the presence of a dedicated market maker enhances investor confidence, reduces trading costs, and ensures that ETF prices closely track their underlying assets. He suggests that the development positions Saudi Arabia as a more attractive destination for both domestic and international investors seeking efficient, transparent, and liquid investment vehicles.
As the first entity to be registered under Tadawul’s ETF market making framework, SAB Invest will provide continuous two-way quotes for the SAB Invest Saudi Quant ETF — Saudi Arabia’s first quantitatively driven, Shariah-compliant ETF. This role is designed to deliver better liquidity, tighter bid-ask spreads, and enhanced pricing efficiency, empowering investors with greater flexibility in accessing the Saudi equity market.
Looking at the landscape more broadly, Alqahtani pinpoints the “rapid growth” that the Middle East’s ETF market is experiencing, noting that both Saudi Arabia and the United Arab Emirates (UAE) are at the forefront.
As of mid-2026, Saudi Arabia’s ETF assets under management (AUM) have reached approximately US$2.38 billion, with the number of listed ETFs rising from 7 in 2022 to 13, according to SAB Invest. The UAE’s ETF AUM has also surged to US$847 million, nearly doubling its ETF count since 2022.
The expansion is underpinned by regulatory reforms, such as the modernisation of Saudi Arabia’s Securities Borrowing and Lending (SBL) framework, which now permits ETFs to be used as eligible securities for lending and collateral purposes.
“These changes are enabling both domestic and international investors to participate more actively in securities lending and repo markets, with ETFs increasingly serving as efficient, transparent vehicles for collateral management and liquidity enhancement,” says Alqahtani.
However, he notes that challenges remain, including the need for greater liquidity, further infrastructure development, and the integration of Shariah-compliant practices to ensure broad market participation.
As noted by Jalal Faruki, head of securities at SNB Capital, Shariah-compliant ETFs are particularly important in Saudi Arabia because they can translate passive and rules-based investing into structures that are accessible to investors with Shariah requirements.
Madhur Bhandari, country head of Securities Services, HSBC Saudi Arabia, highlights that while total AUM in ETFs are small at this stage, there is sizeable AUM managed by asset managers in a Shariah compliant manner.
The Capital Market Authority (CMA) framework requires specific disclosures where a fund is Shariah-compliant, including certification by the appointed Shariah committee and disclosure of the committee’s roles, responsibilities, and applicable standards.
Faruki adds: “With clear structuring, disclosure and Shariah governance, Shariah-compliant ETFs could become an important bridge between local investor preferences and global ETF market practices.”
Uncovering the market
Setting the scene, it would appear that not only is the ETF market expanding in the securities finance world, but it is also impacting liquidity, collateral, and risk management strategies. By 2035, the ETF market is projected to reach US$35 trillion in AUM. Following the end of 2025, S&P Global Market Intelligence data estimated full-year net ETF inflows at US$1.5 trillion.
Zoning in on Saudi Arabia, Faruki believes the ETF market here is becoming increasingly relevant to the securities finance discussion as it sits at the intersection of market access, liquidity provision, and SBL.
At year-end 2025, Saudi Exchange data displayed 13 listed ETFs, total AUM of 8.94 billion Saudi riyal (US$2.38 billion), annual traded value of SAR1.19 billion, and 262,553 ETF trades. “This remains modest relative to the size of the Saudi equity market, but growth in AUM and activity shows that ETFs are becoming a more visible part of the market structure,” Faruki notes.
The current Saudi ETF universe covers a range of exposures, including Saudi equities, sukuk, gold, US equities, US technology, Hong Kong/China exposure, and thematic or rules-based strategies.
This matters for securities finance because ETF liquidity depends not only on secondary market trading, says Faruki, but also on the ability of market makers and authorised participants to manage baskets, hedge exposures, facilitate creation and redemption, and source the securities required to support efficient pricing.
SBL and the ETF market go hand in hand; and it appears that the market structure around it is being built to support demand in this area. For instance, in early 2026, Tadawul introduced an ETF market-making framework to strengthen secondary market liquidity and price formation. In addition, it confirmed that ETF market makers can borrow via SBL to support their activity.
Bhandari says: “SLB is embedded in the market structure. All listed securities are eligible, except tradable rights. Lenders can earn incremental returns, while borrowers support shorting and hedging, posting at least 100 per cent collateral, with Edaa as depository and Muqassa as central counterparty.
“Foreign access also widened from 1 February 2026, when the CMA removed the Qualified Foreign Investor concept, alongside Edaa amendments that allow borrowing for re-lending to clients of brokers, custody members, and foreign financial institutions.”
Further, the SBL framework in Saudi Arabia enables the temporary transfer of securities between lender and borrower, Faruki says this helps market participants manage activity and mitigate settlement risk. Under the SBL Regulations, borrowing can be used for purposes including short selling, relending to clients, settlement failure resolution, and the creation of ETF units.
“In this sense, ETFs and securities lending should be viewed as complementary market-structure tools. As the ETF market in Saudi Arabia broadens, particularly across fixed income, Shariah-compliant, thematic and cross-border strategies, the need for reliable lending supply, collateral management, and ETF market-making support should naturally increase,” Faruki adds.
Advocating for robust governance
The key for success in any emerging market, or an established one, is governance. Saudi Arabia has made notable strides in this respect when it comes to securities lending, working with associations as well as local and international participants to build a strong framework. The same concept will need to be applied to the ETF market in order to provide firms with transparency and confidence.
“Improving governance should attract both domestic and international investors because it reduces operational uncertainty,” notes Faruki. “For domestic investors, it can support broader adoption of ETFs as transparent, liquid investment tools. For international investors, it helps bring Saudi ETF and SBL practices closer to the standards international investors already use, while retaining local regulatory and Shariah requirements.”
To begin this discussion, we must first know where the market stands. Faruki provides an overview of the current regulatory initiatives and practices in place to support market participants.
The CMA Investment Funds Regulations require ETF units to be deposited with the Saudi Securities Depository Center Company (Edaa), allow ETF units to be issued or cancelled in cash or in kind, require appointment of a licensed market maker, require regular disclosure of indicative net asset value during the trading day, and require disclosure of component securities and weightings on the Exchange, he explains.
Separately, Edaa’s SBL Regulations require a binding written SBL agreement, minimum collateral of at least 100 per cent of the current market value of borrowed securities, transaction reporting, and record-keeping by custody members.
Faruki believes the next stage of development is about deepening confidence in how these rules operate in practice.
“Governance is a key enabler of a scalable ETF and securities finance ecosystem, because it gives market participants confidence in how risk is managed and how returns are shared,” suggests Andrew Stephen, executive director, buy-side Trading Services at J.P. Morgan. “In practice, this means clear standards and consistent market practice around disclosures, collateral quality and management, counterparty risk controls, revenue splits, and investor protections.”
In Stephen’s eyes, the more transparent and predictable these guardrails are, the easier it is for market makers, authorised participants, custodians, and global investors to commit balance sheet and scale activity over time.
The introduction of Tadawul’s ETF market-making framework aims to create a more dynamic and accessible ETF ecosystem. Alongside this framework, which could improve execution certainty and investor confidence in Saudi-listed ETFs, Stephen says a broader range of products, efficient creation and redemption mechanisms, and the continued development of supporting infrastructure such as securities lending and financing, can create a more mature ETF ecosystem.
Reviewing the market and the factors which could contribute to more robust governance, SAB Invest’s Alqahtani has suggested a three-pronged approach alongside the message: “Transparency is foundational.”
Mandate real-time disclosure of ETF holdings, lending activity, and collateral arrangements, with clear and transparent rules governing ETF short selling and reporting.
The development of a centralised platform for securities lending and borrowing, underpinned by the adoption of international best practices for collateral management and counterparty risk oversight.
Regular review and public reporting of market maker performance and ETF liquidity metrics, alongside targeted initiatives to improve investor literacy on ETF mechanics, their application in securities lending, and the associated risks and benefits.
He concludes: “Taken together, these measures would align Saudi Arabia’s ETF market with global standards, increase transparency, and further attract institutional and international capital. Enhanced governance not only mitigates risk — it builds the trust that is essential to capital inflows.”
With growth comes new prospects
As market participants anticipate the future development of Saudi’s ETF market, they reflect on their own participation and initiatives in the region.
HSBC Saudi Arabia’s work on ETFs is focused on market infrastructure rather than product issuance. With ETF market-makers now able to borrow to support pricing, the bank’s role as agent lender is to connect that demand with domestic supply — lending both ETF units and the underlying basket constituents and supporting smooth creation and redemption.
Bhandari comments: “Client interest is clearly increasing with growth in supply from domestic clients seeking increasing yield on otherwise static holdings and demand from international clients increasing owing to the recent relaxation in foreign ownership. This allows a larger pool of foreign players to be active.”
J.P. Morgan has seen a steady increase in inventory entering its lending programme, reflecting the breadth and depth of the Saudi market. A growing component of this has been retail driven supply, which in turn is driving a corresponding uptick in ETFs available for lending mirroring underlying client behaviour, notes Stephen. Mobilising this inventory efficiently to meet borrower demand and maximise value for clients remains a core focus for the firm.
On the other side of the trade, J.P. Morgan continues to work closely with triparty agents including leveraging J.P. Morgan’s own platform to support counterparties in financing Saudi ETFs, notably through working on expanding collateral eligibility to include these assets.
Stephen pinpoints Shariah-compliance as a key factor across the Saudi market, not limited to just ETFs. “We have seen first-hand even through the launch of our securities lending capabilities across the Kingdom that this is a key requirement for many clients and has a direct impact on the success of many of these new initiatives.”
In agreement, market participants anticipate the role of ETF-linked securities lending to take an upward trajectory over the next few years. The importance of ETFs in the region and within the securities lending and securities finance sector is evident, given client demand and the push from firms for its further development.
Providing a positively optimistic stand on the market, Alqahtani says: “The region is expected to outpace global averages in ETF market growth, driven by regulatory liberalisation, cross-border fund passporting, and the introduction of innovative products — including Shariah-compliant and quantitative ETFs.” As market infrastructure matures and liquidity deepens, Alqahtani believes ETFs will become more widely used as collateral and lending vehicles.
Following a similar train of thought, HSBC Saudi Arabia’s Bhandari anticipates the ETF market-maker pool will expand, subsequently increasing borrowing demand. In addition, he believes netting legislation will be implemented, therefore unlocking larger international flows, alongside the maturation of agent lending and triparty collateral capabilities.
For Faruki, the first area of development in this market is likely to be operational, rather than product-led. As ETF issuers, market makers, custodians, and institutional investors become more active, he suggests securities lending should support more efficient creation and redemption, better secondary market liquidity, settlement failure management, hedging, and short selling activity where permitted.
From a product breadth perspective, Faruki says the market could develop further across sector, factor, fixed income, Shariah-compliant, international, and cross-listed strategies. “Each additional product category creates new requirements for market-making capacity, underlying basket liquidity, inventory management, and borrow availability.”
Providing a J.P. Morgan perspective, Stephen states that more ETFs should begin lending out portions of the underlying shares they hold, typically starting with the most liquid names and scaling as funds become a more meaningful pool of inventory. At the same time, he says borrowing and lending of ETF units themselves should increase because it is a clean way to take or hedge broad exposure without having to source borrow across many single stocks.
He concludes: “The growth will not be uniform, since the ETFs with the most consistent turnover and the least settlement friction will build borrow depth first while smaller or more specialised products lag.
“A good indicator that the market is moving from occasional activity to something more routine will be sustained increases in ETF AUM and turnover, more consistent two-way pricing from market makers, and greater use of ETFs and their baskets, around rebalances and volatility — times when borrow availability and settlement efficiency matter most.”
Bringing this discussion to a close, the future of ETFs within securities lending seems bright, with many prospects on the horizon. While it is a market still emerging, the Kingdom of Saudi Arabia offers much promise for both domestic and international players. The key takeaway: watch this space, and watch it closely.
In May 2026, SAB Invest, the investment arm of Saudi Awwal Bank (SAB), announced its official registration by the Saudi Exchange (Tadawul) as the first ETF market maker in the Kingdom. This achievement marked a new era for the country’s capital market, according to the firm, supporting Vision 2030’s Financial Sector Development Program and delivering tangible benefits to investors through improved ETF trading efficiency.
According to EquiLend Data & Analytics, since SAB Invest’s market making activities began on 18 May 2026, securities lending balances for Saudi Arabia-listed equities have risen by 2.4 per cent to US$1.3 billion.
Further, inventory levels increased by 3.4 per cent to US$24.5 billion, and average fees have dropped by 2.2 per cent to 424 basis points.
The importance of securities lending liquidity for market makers is essential to borrow and hedge efficiently, states EquiLend, and since the beginning of the year, inventory has increased by 157 per cent to US$24.5 billion with new participants expanding into the Kingdom’s emerging lending market.
Speaking with Securities Finance Times, Majed Alqahtani, chief brokerage officer at SAB Invest, says the presence of a dedicated market maker enhances investor confidence, reduces trading costs, and ensures that ETF prices closely track their underlying assets. He suggests that the development positions Saudi Arabia as a more attractive destination for both domestic and international investors seeking efficient, transparent, and liquid investment vehicles.
As the first entity to be registered under Tadawul’s ETF market making framework, SAB Invest will provide continuous two-way quotes for the SAB Invest Saudi Quant ETF — Saudi Arabia’s first quantitatively driven, Shariah-compliant ETF. This role is designed to deliver better liquidity, tighter bid-ask spreads, and enhanced pricing efficiency, empowering investors with greater flexibility in accessing the Saudi equity market.
Looking at the landscape more broadly, Alqahtani pinpoints the “rapid growth” that the Middle East’s ETF market is experiencing, noting that both Saudi Arabia and the United Arab Emirates (UAE) are at the forefront.
As of mid-2026, Saudi Arabia’s ETF assets under management (AUM) have reached approximately US$2.38 billion, with the number of listed ETFs rising from 7 in 2022 to 13, according to SAB Invest. The UAE’s ETF AUM has also surged to US$847 million, nearly doubling its ETF count since 2022.
The expansion is underpinned by regulatory reforms, such as the modernisation of Saudi Arabia’s Securities Borrowing and Lending (SBL) framework, which now permits ETFs to be used as eligible securities for lending and collateral purposes.
“These changes are enabling both domestic and international investors to participate more actively in securities lending and repo markets, with ETFs increasingly serving as efficient, transparent vehicles for collateral management and liquidity enhancement,” says Alqahtani.
However, he notes that challenges remain, including the need for greater liquidity, further infrastructure development, and the integration of Shariah-compliant practices to ensure broad market participation.
As noted by Jalal Faruki, head of securities at SNB Capital, Shariah-compliant ETFs are particularly important in Saudi Arabia because they can translate passive and rules-based investing into structures that are accessible to investors with Shariah requirements.
Madhur Bhandari, country head of Securities Services, HSBC Saudi Arabia, highlights that while total AUM in ETFs are small at this stage, there is sizeable AUM managed by asset managers in a Shariah compliant manner.
The Capital Market Authority (CMA) framework requires specific disclosures where a fund is Shariah-compliant, including certification by the appointed Shariah committee and disclosure of the committee’s roles, responsibilities, and applicable standards.
Faruki adds: “With clear structuring, disclosure and Shariah governance, Shariah-compliant ETFs could become an important bridge between local investor preferences and global ETF market practices.”
Uncovering the market
Setting the scene, it would appear that not only is the ETF market expanding in the securities finance world, but it is also impacting liquidity, collateral, and risk management strategies. By 2035, the ETF market is projected to reach US$35 trillion in AUM. Following the end of 2025, S&P Global Market Intelligence data estimated full-year net ETF inflows at US$1.5 trillion.
Zoning in on Saudi Arabia, Faruki believes the ETF market here is becoming increasingly relevant to the securities finance discussion as it sits at the intersection of market access, liquidity provision, and SBL.
At year-end 2025, Saudi Exchange data displayed 13 listed ETFs, total AUM of 8.94 billion Saudi riyal (US$2.38 billion), annual traded value of SAR1.19 billion, and 262,553 ETF trades. “This remains modest relative to the size of the Saudi equity market, but growth in AUM and activity shows that ETFs are becoming a more visible part of the market structure,” Faruki notes.
The current Saudi ETF universe covers a range of exposures, including Saudi equities, sukuk, gold, US equities, US technology, Hong Kong/China exposure, and thematic or rules-based strategies.
This matters for securities finance because ETF liquidity depends not only on secondary market trading, says Faruki, but also on the ability of market makers and authorised participants to manage baskets, hedge exposures, facilitate creation and redemption, and source the securities required to support efficient pricing.
SBL and the ETF market go hand in hand; and it appears that the market structure around it is being built to support demand in this area. For instance, in early 2026, Tadawul introduced an ETF market-making framework to strengthen secondary market liquidity and price formation. In addition, it confirmed that ETF market makers can borrow via SBL to support their activity.
Bhandari says: “SLB is embedded in the market structure. All listed securities are eligible, except tradable rights. Lenders can earn incremental returns, while borrowers support shorting and hedging, posting at least 100 per cent collateral, with Edaa as depository and Muqassa as central counterparty.
“Foreign access also widened from 1 February 2026, when the CMA removed the Qualified Foreign Investor concept, alongside Edaa amendments that allow borrowing for re-lending to clients of brokers, custody members, and foreign financial institutions.”
Further, the SBL framework in Saudi Arabia enables the temporary transfer of securities between lender and borrower, Faruki says this helps market participants manage activity and mitigate settlement risk. Under the SBL Regulations, borrowing can be used for purposes including short selling, relending to clients, settlement failure resolution, and the creation of ETF units.
“In this sense, ETFs and securities lending should be viewed as complementary market-structure tools. As the ETF market in Saudi Arabia broadens, particularly across fixed income, Shariah-compliant, thematic and cross-border strategies, the need for reliable lending supply, collateral management, and ETF market-making support should naturally increase,” Faruki adds.
Advocating for robust governance
The key for success in any emerging market, or an established one, is governance. Saudi Arabia has made notable strides in this respect when it comes to securities lending, working with associations as well as local and international participants to build a strong framework. The same concept will need to be applied to the ETF market in order to provide firms with transparency and confidence.
“Improving governance should attract both domestic and international investors because it reduces operational uncertainty,” notes Faruki. “For domestic investors, it can support broader adoption of ETFs as transparent, liquid investment tools. For international investors, it helps bring Saudi ETF and SBL practices closer to the standards international investors already use, while retaining local regulatory and Shariah requirements.”
To begin this discussion, we must first know where the market stands. Faruki provides an overview of the current regulatory initiatives and practices in place to support market participants.
The CMA Investment Funds Regulations require ETF units to be deposited with the Saudi Securities Depository Center Company (Edaa), allow ETF units to be issued or cancelled in cash or in kind, require appointment of a licensed market maker, require regular disclosure of indicative net asset value during the trading day, and require disclosure of component securities and weightings on the Exchange, he explains.
Separately, Edaa’s SBL Regulations require a binding written SBL agreement, minimum collateral of at least 100 per cent of the current market value of borrowed securities, transaction reporting, and record-keeping by custody members.
Faruki believes the next stage of development is about deepening confidence in how these rules operate in practice.
“Governance is a key enabler of a scalable ETF and securities finance ecosystem, because it gives market participants confidence in how risk is managed and how returns are shared,” suggests Andrew Stephen, executive director, buy-side Trading Services at J.P. Morgan. “In practice, this means clear standards and consistent market practice around disclosures, collateral quality and management, counterparty risk controls, revenue splits, and investor protections.”
In Stephen’s eyes, the more transparent and predictable these guardrails are, the easier it is for market makers, authorised participants, custodians, and global investors to commit balance sheet and scale activity over time.
The introduction of Tadawul’s ETF market-making framework aims to create a more dynamic and accessible ETF ecosystem. Alongside this framework, which could improve execution certainty and investor confidence in Saudi-listed ETFs, Stephen says a broader range of products, efficient creation and redemption mechanisms, and the continued development of supporting infrastructure such as securities lending and financing, can create a more mature ETF ecosystem.
Reviewing the market and the factors which could contribute to more robust governance, SAB Invest’s Alqahtani has suggested a three-pronged approach alongside the message: “Transparency is foundational.”
Mandate real-time disclosure of ETF holdings, lending activity, and collateral arrangements, with clear and transparent rules governing ETF short selling and reporting.
The development of a centralised platform for securities lending and borrowing, underpinned by the adoption of international best practices for collateral management and counterparty risk oversight.
Regular review and public reporting of market maker performance and ETF liquidity metrics, alongside targeted initiatives to improve investor literacy on ETF mechanics, their application in securities lending, and the associated risks and benefits.
He concludes: “Taken together, these measures would align Saudi Arabia’s ETF market with global standards, increase transparency, and further attract institutional and international capital. Enhanced governance not only mitigates risk — it builds the trust that is essential to capital inflows.”
With growth comes new prospects
As market participants anticipate the future development of Saudi’s ETF market, they reflect on their own participation and initiatives in the region.
HSBC Saudi Arabia’s work on ETFs is focused on market infrastructure rather than product issuance. With ETF market-makers now able to borrow to support pricing, the bank’s role as agent lender is to connect that demand with domestic supply — lending both ETF units and the underlying basket constituents and supporting smooth creation and redemption.
Bhandari comments: “Client interest is clearly increasing with growth in supply from domestic clients seeking increasing yield on otherwise static holdings and demand from international clients increasing owing to the recent relaxation in foreign ownership. This allows a larger pool of foreign players to be active.”
J.P. Morgan has seen a steady increase in inventory entering its lending programme, reflecting the breadth and depth of the Saudi market. A growing component of this has been retail driven supply, which in turn is driving a corresponding uptick in ETFs available for lending mirroring underlying client behaviour, notes Stephen. Mobilising this inventory efficiently to meet borrower demand and maximise value for clients remains a core focus for the firm.
On the other side of the trade, J.P. Morgan continues to work closely with triparty agents including leveraging J.P. Morgan’s own platform to support counterparties in financing Saudi ETFs, notably through working on expanding collateral eligibility to include these assets.
Stephen pinpoints Shariah-compliance as a key factor across the Saudi market, not limited to just ETFs. “We have seen first-hand even through the launch of our securities lending capabilities across the Kingdom that this is a key requirement for many clients and has a direct impact on the success of many of these new initiatives.”
In agreement, market participants anticipate the role of ETF-linked securities lending to take an upward trajectory over the next few years. The importance of ETFs in the region and within the securities lending and securities finance sector is evident, given client demand and the push from firms for its further development.
Providing a positively optimistic stand on the market, Alqahtani says: “The region is expected to outpace global averages in ETF market growth, driven by regulatory liberalisation, cross-border fund passporting, and the introduction of innovative products — including Shariah-compliant and quantitative ETFs.” As market infrastructure matures and liquidity deepens, Alqahtani believes ETFs will become more widely used as collateral and lending vehicles.
Following a similar train of thought, HSBC Saudi Arabia’s Bhandari anticipates the ETF market-maker pool will expand, subsequently increasing borrowing demand. In addition, he believes netting legislation will be implemented, therefore unlocking larger international flows, alongside the maturation of agent lending and triparty collateral capabilities.
For Faruki, the first area of development in this market is likely to be operational, rather than product-led. As ETF issuers, market makers, custodians, and institutional investors become more active, he suggests securities lending should support more efficient creation and redemption, better secondary market liquidity, settlement failure management, hedging, and short selling activity where permitted.
From a product breadth perspective, Faruki says the market could develop further across sector, factor, fixed income, Shariah-compliant, international, and cross-listed strategies. “Each additional product category creates new requirements for market-making capacity, underlying basket liquidity, inventory management, and borrow availability.”
Providing a J.P. Morgan perspective, Stephen states that more ETFs should begin lending out portions of the underlying shares they hold, typically starting with the most liquid names and scaling as funds become a more meaningful pool of inventory. At the same time, he says borrowing and lending of ETF units themselves should increase because it is a clean way to take or hedge broad exposure without having to source borrow across many single stocks.
He concludes: “The growth will not be uniform, since the ETFs with the most consistent turnover and the least settlement friction will build borrow depth first while smaller or more specialised products lag.
“A good indicator that the market is moving from occasional activity to something more routine will be sustained increases in ETF AUM and turnover, more consistent two-way pricing from market makers, and greater use of ETFs and their baskets, around rebalances and volatility — times when borrow availability and settlement efficiency matter most.”
Bringing this discussion to a close, the future of ETFs within securities lending seems bright, with many prospects on the horizon. While it is a market still emerging, the Kingdom of Saudi Arabia offers much promise for both domestic and international players. The key takeaway: watch this space, and watch it closely.
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