Exchange traded funds (ETFs) have become one of the main ways investors gain exposure to a market, a sector or an asset class at low cost. In Saudi Arabia the range listed on the Saudi Exchange has grown from a handful of domestic equity trackers to include sovereign sukuk, gold and foreign equity exposures that an investor can buy in riyals through an ordinary brokerage account. As more fund managers consider launching one, it is worth setting out plainly what an ETF is under Saudi rules, who can launch one, how it operates and what makes it work.
The short description is that an ETF is a public investment fund that is listed. The longer description is that an ETF only functions if three things happen at once: the fund manager publishes what the fund is worth throughout the trading day, a licensed party can create and cancel units in large blocks against the underlying assets, and a market maker stands in the order book with a two-way price. Remove any one of these and the product stops behaving like an ETF.
What an ETF is, and what it is not
A conventional open-ended fund is bought from and sold back to the fund manager at the net asset value calculated at the next valuation point; the fund expands and contracts as money comes in and goes out. A closed-ended traded fund sits at the other end of the spectrum: it raises a fixed amount of capital, lists its units, and thereafter investors trade only with each other, so the market price can drift a long way from the value of the assets.
An ETF combines the two. Like a listed company, its units trade on the Exchange throughout the day at whatever price buyers and sellers agree. Like an open-ended fund, its units can be created or cancelled so that supply responds to demand. The link between the two is an arbitrage: if the market price rises above the value of the portfolio, a market maker can buy the underlying securities, deliver them to the fund in exchange for new units and sell those units into the market, and the reverse when the price falls below. It is this mechanism, rather than any rule, that keeps an ETF trading close to its net asset value.
The Investment Funds Regulations keep the categories apart: ETFs in Article 48, closed-ended investment traded funds in Articles 49 to 54, and listed real estate vehicles (REITs) under their own regulations.
Where ETFs sit in the Saudi rulebook
Article 48 appears in Part 4 of the Investment Funds Regulations, which governs public funds. That placement is the single most important point for anyone planning a product.
A Saudi ETF is a public fund: it is approved by the CMA rather than merely notified, it must have a fund board with independent members, its Terms and Conditions follow the public fund template, and it is subject to the public fund investment limits.
It cannot be structured as a private fund, which is offered by private placement and never listed, nor as a simplified investment fund under the CMA's March 2026 Instructions, which are confined to institutional clients. Listing, public price discovery and a market maker are public-market features by nature.
The regulations do offer a route for a more institutional product. An index ETF may list on the Parallel Market, where the offer is limited to the categories of Qualified Investors recognized for that market. In return the fund may borrow up to 75% of its net asset value and invest up to 25% in derivatives, against 15% and 15% for an ordinary public fund. That is the Saudi equivalent of a professional-investor ETF and the natural home for leveraged or more specialized index strategies.
Who can launch an ETF
The fund manager must be a capital market institution licensed by the CMA for Managing Investments and Operating Funds, or appoint a separately licensed fund operator. Around it sit the parties required for every public fund: an independent custodian, which in an ETF also carries the specific duty of ensuring that every unit created or cancelled is matched by assets received or paid; an external auditor; a fund board with independent members; and, for a Shariah-compliant product, a Shariah supervisory committee.
Two further parties are peculiar to the ETF. The first is the index provider: the regulations require an acceptable index to be publicly available, adequately diversified and liquid, and composed solely of securities traded on the Saudi Exchange or on a foreign exchange of equivalent standard, and the licence is a real cost, with one listed foreign-equity ETF disclosing a benchmark fee of 0.06% of net assets a year. The second is the market maker, discussed below.
The approval runs on two tracks; an application to the CMA to register and offer the units, filed simultaneously with a listing application to the Saudi Exchange under the Listing Rules. The units are deposited with the Securities Depository Center (Edaa), which maintains the register of unitholders, and once listed the fund's documents and announcements are treated as delivered to unitholders when published on the Exchange's website.
How an ETF works day to day
The primary market: creating and cancelling units
Ordinary investors do not subscribe to or redeem from a Saudi ETF. Units are created and cancelled only in blocks, often called creation units or baskets, of a size fixed in the Terms and Conditions; one listed US equity ETF sets its block at 100,000 units.
Creation is usually in kind: the market maker delivers the basket of securities, plus a small cash component, into the fund's account through the custodian and receives the corresponding units. Cancellation is the reverse, and at the end of each day the custodian and the market maker settle any difference between units issued and assets delivered.
The secondary market and its pricing
Everyone else buys and sells units on the Saudi Exchange through a broker, in the same order book, at the same hours and with the same settlement as shares. There is no subscription form; a person who buys a unit on the Exchange is deemed to have read, accepted and signed the fund's Terms and Conditions.
Three disclosures keep that market honest. During the trading day the fund manager publishes an indicative net asset value, in practice every 15 seconds, built from the live prices of the portfolio constituents. At the close it publishes the full net asset value per unit. And it discloses the constituent securities and their weights, so that the market maker and any other participant can see exactly what a unit represents. For a fund holding foreign securities the iNAV will largely reflect the previous close in the foreign market, because trading hours and trading weeks differ; such funds disclose this as a specific risk.
The market maker: the part that makes an ETF an ETF
Article 48 requires the fund manager to appoint one or more capital market institutions licensed for Dealing to act as market maker, and requires the market maker to comply at all times with the terms agreed with the fund manager and disclosed in the Terms and Conditions.
The CMA has since made that disclosure more specific, the Terms and Conditions must set out the market maker's details and the agreed requirements, including the price range within which it commits to place its buy and sell orders and the minimum value of those orders.
The reason the regulator insists on this is practical. An ETF's units may be held by thousands of investors, but on any given day only a few of them want to trade. Without a party obliged to quote, a seller could face an empty order book and a buyer could pay a price far above the value of the underlying assets. The market maker fills that gap in three ways.
• Continuous two-way prices. By placing buy and sell orders throughout the session within an agreed band around the iNAV, the market maker ensures that an investor can deal at any time at a price that bears a known relationship to the value of the portfolio.
• Arbitrage between the two markets. Because it can create units in kind when demand pushes the price above iNAV, and cancel them when supply pushes it below, the market maker is the party that closes the gap between the exchange price and the net asset value. The creation unit and the market maker are two halves of one system.
• Initial and ongoing liquidity. At launch the market maker typically seeds the fund by creating the first blocks of units, and thereafter it is the counterparty through which the fund grows and shrinks.
The market maker earns its return from the bid-offer spread and from arbitrage, not from fees paid by the fund, which is why the quality of market making varies and why the disclosed terms matter. A wide permitted band, a small minimum order size or an obligation that lapses in volatile conditions all translate into higher costs for the end investor.
A single market maker is also a concentration risk, which Saudi ETF documents expressly acknowledge: if that party withdraws or cannot quote, creations and redemptions slow and the premium or discount widens.
For the sponsor, the choice between an in-house market maker and an independent one is therefore not only commercial; it affects how tight the spreads are likely to be and how resilient the product is in a stressed market. As the number of listed ETFs grows, the depth of market making will determine whether they attract real secondary-market participation or remain thinly traded wrappers.
What kinds of funds can be ETFs
The regulations restrict the structure, not the asset class. The Saudi market has so far seen domestic equity index ETFs tracking Exchange indices or sector baskets; sovereign sukuk ETFs holding riyal-denominated government sukuk and distributing the coupon income, which open an otherwise institutional market to retail investors; foreign equity ETFs holding US or Asian equities directly, quoted in riyals and screened for Shariah compliance at index level; and commodity ETFs, in particular gold.
Every Saudi ETF to date has been a passive index tracker, but nothing in Article 48 confines the structure to index funds; an actively managed ETF would be governed by the general public fund rules and would need to meet the same daily holdings disclosure. Real estate is the exception, a listed real estate vehicle is a REIT under its own regulations and is closed-ended by design.
A listed example: a Saudi sovereign sukuk ETF
The Terms and Conditions of the Albilad Saudi Sovereign Sukuk ETF, one of the longer-established ETFs on the Exchange, show how the pieces fit together. The fund passively tracks an index of riyal-denominated sovereign sukuk listed on the Exchange with at least three months to maturity, rebalanced monthly, and holds at least 95% of its assets in those sukuk.
Units are created and cancelled in kind against a basket of the index constituents, with an independent custodian moving the basket between the market maker's account and the fund's account and reconciling the two.
The iNAV is published every 15 seconds and the closing NAV within three hours of the close. The market maker commits to keep its orders within 2% of the iNAV, may begin quoting after the first five minutes of the session and may enter orders in the final five minutes before the close. The management fee is 0.30% of net assets a year and coupon income is distributed monthly.
The risk section of the document is candid about the structure's weak points, units may trade at a premium or discount to NAV, the spread may exceed the permitted band in stressed conditions, and the fund depends on a limited number of market makers for its liquidity. Those disclosures are, in effect, a description of what the market maker is there to prevent.
Benefits and trade-offs
Investors get intraday liquidity at a transparent price, daily visibility of what they own, low running costs and access to markets such as sovereign sukuk or foreign equities that would otherwise be difficult to reach from a Saudi account.
For fund managers the format is a distribution channel that does not depend on a sales force: any investor with a brokerage account is a potential unitholder.
The trade-offs are equally real. The price an investor pays is the market price, not the NAV, and the difference is a cost that does not appear in the fee table.
The spread is a cost on both entry and exit. Tracking error means the fund will not match its index exactly; Saudi ETF documents typically target a maximum deviation of 1.5% to 2% a year. The all-in expense of a foreign-exposure ETF, once index licence, depository, custody and dealing costs are added, can be materially higher than the headline management fee. And an ETF that is thinly traded offers liquidity in theory rather than in practice, which returns the discussion to the market maker.
What a prospective sponsor should think about
For a capital market institution weighing an ETF launch, the licence is rarely the obstacle. The product decisions are.
• The index and its cost. Whether to license an established international index or build a proprietary one with a recognised calculation agent, and whether the constituents meet the regulations' liquidity and listing conditions.
• The creation unit. A block large enough to make in-kind delivery efficient but small enough that a market maker is willing to carry it.
• The market-making agreement. The price band, minimum order sizes, quoting hours, exceptions in stressed markets and whether to appoint more than one market maker. These terms will be published, and investors and the regulator will read them.
• Venue. The Main Market for a broad retail product; the Parallel Market where the strategy needs more leverage or derivative capacity and the target investor is institutional.
• Operational readiness. Intraday iNAV calculation, daily holdings publication on the Exchange, Edaa settlement, custodian reconciliation and, for foreign exposures, the handling of time-zone and holiday mismatches.
A structure that depends on its plumbing
The attraction of an ETF is its simplicity for the investor: one ticker, one price, one trade. That simplicity is produced by machinery behind the screen, and the Saudi framework names each part of it, from the custodian's reconciliation duty to the market maker's disclosed price band. The sponsors who succeed will be those who treat the market-making arrangement not as a regulatory box to tick but as the feature that determines whether their product is worth owning.
References
• Saudi Exchange — Albilad Saudi Sovereign Sukuk ETF, Terms and Conditions
• Saudi Exchange — Albilad MSCI US Equity ETF, Terms and Conditions
