If there is one region of the world where investors can usually
agree on the economic fundamentals, it has to be the Middle East.
The area is world-famous for its hydrocarbon prowess, relatively
high GDP per capita levels, and as of late, its political
volatility as well.
Given the immense potential that these countries have thanks to
their fossil fuel exports and how they are transforming their
economies for the long term, parts of the region could be ripe for
investment for those with a long time horizon and a stomach for
volatility. Unfortunately, the region remains relatively closed-off
from an investment perspective as few ADRs trade here in the States
while other options are sparse to say the least.
However, there are a few exchange-traded funds that can make for
interesting ways to target the region with a diversified, and thus
lower risk, approach. Currently, there are two ETFs that offer
direct exposure to this important region of the world, the
WisdomTree Middle East Dividend Fund ( GULF
) and the Market Vectors Gulf States Index ETF (
Since many investors view the region as a monolithic economy, in
which the entire area is completely dependent on fossil fuels for
growth, it might be assumed that there is virtually no difference
between these two Middle East ETFs. Yet, when one takes a look at
the return and risk of these products, that is certainly not the
case (see The Truth about Low Volume ETFs ).
In fact, according to our research (based on daily price returns
from the past three years) MES and GULF have a correlation of just
0.57, suggesting that at least 40% of the time these two products
move independently of each other, despite the fact that they track
substantially similar countries. This is somewhat shocking at first
glance as both target similar firms as well, although when one
dives deeper into the holdings, it becomes clearer that these two
Middle East ETFs are more different than you might have originally
First, investors should note that MES tracks the Dow Jones GCC
Titans 40 index. This benchmark focuses exposure on Gulf
Cooperation Council nations, offering up exposure to some of the
richest-but also smallest nations-in the world (Read Small Cap Value ETF Investing 101 ).
Meanwhile, GULF, despite its ticker, has a broader geographic
range but a narrower security focus, thanks to tracking the
WisdomTree Middle East Dividend Index. This benchmark,
unsurprisingly, holdings dividend paying stocks from around the
Middle East, including a 10% allocation to Egypt.
Still, despite various geographic focuses, investors should note
that both put their top three allocations into the same nations of
Qatar, the UAE, and Kuwait. In both cases, these three make up more
than two-thirds of the total assets, suggesting that despite the
different security stipulations, both are zeroing in on the same
nations for their exposure (see Five Great Global ETFs for Complete Equity
Yet despite this national similarity, the asset allocation is
pretty different for the two products. Financials (43%), telecom
(31%), and industrials (15%) comprise the bulk of the assets in
GULF, while in MES, financials (58%) make up a majority, leaving
much less for telecoms (15%) and industrials (12%).
So clearly, the holdings picture accounts for much of the
difference between these two seemingly similar funds. Additionally,
GULF's dividend focus surprisingly gives the fund less of a
concentration in financials, although it does help to boost the
fund's yield over its Van Eck counterpart.
These differences are also part of the reason for the wildly
divergent performances between the two ETFs so far in 2012. Since
the start of the year, MES has added about 5.8% while GULF has
retreated over 1.1% in the same time frame (read Will the Egypt ETF Be Crushed By More Turmoil?
Meanwhile, in longer time periods, such as from a two year look,
MES maintains its lead over GULF although both have gained in that
time period (MES leads by about 240 basis points). However, it is
also important to remember that MES costs ten basis points more per
year and pays out roughly 70 basis points less in yield, suggesting
that much of the return differential can be eaten up by these two
Either way, it appears that while MES and GULF appear quite
similar at first glance, these are actually two very different
funds. It is true that they both focus on the Middle East region
but they do it in very different ways, neither of which seem likely
to be appropriate for all investors in every situation. Once
again, the adage of 'know what is in your ETF' is proven true (see
Three Biggest Mistakes of ETF Investing ).
Clearly, you cannot rely on a fund's name or geographic focus in
order to assume that two similarly named funds will perform the
same. After all, if this can happen in the case of the Middle East,
where returns are nearly universally driven by oil and investment
of hydrocarbon dollars, it can definitely happen in other corners
of the ETF world, suggesting that a close inspection of the
underlying holdings is vital no matter what market segment you are
Dividend Yield (annual)
Beta (against S&P 500 last 3yrs)
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WISDMTR-ME DIV (GULF): ETF Research Reports
MKT VEC-GULF ST (MES): ETF Research Reports
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