DUBAI, June 27 (Reuters) - An Abu Dhabi-based asset management firm said on Monday it was launching a physical, in-kind exchange-traded fund (ETF), which would invest in the largest United Arab Emirates stocks by capitalisation.

Afkar Capital, which was founded at the end of last year, is launching the UAE dirham-denominated fund despite volatility in local equity markets because of low oil prices and global economic instability.

The ETF will list on the Dubai Financial Market on Wednesday, replicating the S&P UAE BMI Liquid 20/35 Capped Index, Afkar's chief executive Seif Fikry told Reuters. He declined to give a projection for the size of the fund, saying it would be open to all investors.

Unlike swap-based ETFs, which replicate equity indexes using derivatives, physical, in-kind ETFs hold the underlying stocks in an index through a custodian - an arrangement which proponents say can reduce counterparty risk. BNY Mellon will be global custodian for the fund.

(Reporting by Andrew Torchia, editing by David Evans) ((andrew.torchia@thomsonreuters.com; +9715 6681 7277; Reuters Messaging: andrew.torchia.thomsonreuters.com@reuters.net))