Guide to Middle East ETF Investing
Investing in the Middle East stock market might look to be daunting at this moment when the price of crude oil , which accounts for the lion's share of the region's revenues, continues to plunge and is currently trading near its six-year low. Geopolitical tension and depleting foreign reserves are some of the other issues disturbing the investment climate in the region (read: Oil Tumbles to Six-Year Low: ETF Tale of Two Sides ).
However, there is a potential upside to this dismal economic environment. Tumbling oil price has in fact led to the development of the non-oil sector in the Middle East, such as agriculture, banking, finance and tourism. If we look at the Purchasing Managers' ("PMI") Indices of two prominent Middle East economies - Saudi Arabia and United Arab Emirates - non-oil business activity in the region actually looks robust.
The PMI index measures the performance of the non-oil private sector and is derived from a survey of 400 companies, including manufacturing, services, construction and retail. PMI in Saudi Arabia increased to 58.7% in August from 57.7% in July, while PMI in United Arab Emirates rose to 57.1% from 55.8% in July. Notably, both are higher than the PMI of 53.1% in the U.S. in the same month.
According to an insight from Standard Chartered Bank, the long-term growth outlook for oil-rich regions in the Middle East remains positive. This is largely due to the higher emphasis laid by the governments of the region on long-term development objectives achieved through diversification. The insight highlights demographics and the rapid expansion of trade corridors as the two key factors driving growth in the region, particularly in banking and financial services.
The International Monetary Fund (IMF) expects population in the 25 years age bracket to rise to 720 million from 445 million in 2000 in the Middle East and North Africa ("MENA") region during the next five years.
Coming to the question of trading partnerships, Saudi Arabia is currently the largest market for U.S. exports in the Middle East while the U.S. is the largest trading partner of Saudi Arabia, according to Saudi Arabian General Investment Authority ("SAGIA"). According to Standard Chartered Bank, the Middle East enjoys a tripartite trading relationship with Africa and India, which is currently valued at $200 billion and is anticipated to increase manifold to $2.7 trillion by 2030.
In the midst of these positive developments, it seems reasonable to capitalize on the growing non-oil sector in the Middle East through ETF investing, as it is difficult to access the market when most of the businesses in the region are state-owned. Although Saudi Arabia - the biggest stock market in the Arab world and the largest among the Gulf States - opened up its door to foreign direct investment a few months back, ETF investing always remains a safer route as it helps investors to mitigate one company's average performance with stellar results from other companies (read: Middle East ETFs Set to Soar on Saudi Arabia's Foreign Access ).
Below we highlight three ETFs, which offer higher exposure to the non-oil sector in the Middle East as well as to organizations holding the key to future growth (see all Africa-Middle East Equity ETFs here).
WisdomTree Middle East Dividend ETF ( GULF )
Launched in July 2008, this ETF follows the WisdomTree Middle East Dividend Index, which measures the performance of the companies that pay regular cash dividends. It holds a basket of 74 stocks with the largest exposure to the top three firms - Qatar National Bank, First Gulf Bank and Industries Qatar - which collectively make up for more than 23%.
This resulted in financials dominating the fund's portfolio at 62.6% while telecom and industrials round off the top three with 16.7% and 13% allocation, respectively. The oil sector accounts for a meager 2% of the fund. The fund has amassed nearly $26 million in its asset base while trading in a small volume of roughly 10,000 shares a day. It charges 88 bps in fees from investors per year. The product has, however, lost 10.9% so far in the year and has a Zacks ETF Rank of 3 or 'Hold' rating with a Medium risk outlook.
iShares MSCI UAE Capped ( UAE )
Launched in April last year, this ETF follows the MSCI All UAE Capped Index, which measures the performance of large, mid or small-capitalization companies in UAE. Having a portfolio of 31 stocks, the fund's top three holdings include Emaar Properties (16%), Abu Dhabi Commercial Bank (9.5%) and DP World (8.4%).
Again, this ETF is heavily biased toward financials with 70% allocation, while industrials and healthcare have allocations of 17.3% and 5.3%, respectively. Energy has a very low exposure in the fund with only 3.6% share. The ETF has garnered around $30 million in assets and trades in an average volume of roughly 15,000 shares. It charges 62 bps in fees and was down 7.6% in the year-to-date timeframe. The fund carries a Zacks Rank #3 with a High risk outlook.
iShares MSCI Saudi Arabia Capped ( KSA )
Launched only last month, this ETF tracks the MSCI Saudi Arabia Investable Market Index 25/50 Index, which measures the performance of the large, mid and small cap segments of the Saudi Arabia market. With a portfolio of 58 stocks, KSA's top three holdings are Saudi Basic Industries (18.8%), Saudi Telecom (9.1%) and National Commercial Bank (7.8%). Notably, Saudi Basic Industries is one of the largest chemical companies in the world and Saudi Telecom is the largest telecommunications company in the Middle East and Africa ("MEA") region.
This ETF is not as heavily exposed to financials as the other two funds with 33.3% share. Materials and telecom sectors occupy the next two spots with 30.1% and 11.1% shares, respectively. It has minimum exposure to the energy sector (1.3%). Being a new entrant, the fund has gathered only around $4 million in assets and trades in a paltry volume of 2,000 shares. It charges 74 bps in fees per year and was up 3.8% in the last five days.
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