The Bell Tolls For Middle East ETFs
To say Tuesday is a big day for exchange traded funds with significant exposure to the Middle East is an understatement. At 5:30 PM Eastern time, index provider MSCI (NYSE: MSCI) releases its annual market reclassification.
Plenty of eyes will be on South Korea and Taiwan, which are again on the cusp of moving to developed from emerging markets status. However, the big story could be what MSCI decides to do with Qatar and the United Arab Emirates, which have been knocking on the door of the a promotion to emerging markets status from frontier for the past four years.
Even if just one of those two nations makes the jump to emerging from frontier market, it could be a boon for ETFs such as the WisdomTree Middle East Dividend Fund (NASDAQ: GULF). Interestingly, GULF is down almost two percent on volume that is more than two-and-a-half times the daily average. Even with Tuesday's woes, GULF is still up 10.7 percent in the past 90 days while traditional, diversified emerging markets have been hammered over the same time.
Quantifying how GULF and rival ETFs will react if Qatar and UAE get promoted is hard in dollar terms, but it is worth a try. The ETF, which is a fine yield play with a 30-day SEC yield of 3.03 percent, allocates over 66 percent of its weight to the UAE and Qatar.
Bank of New York Mellon estimates that if the pair make the jump to emerging markets status, the countries could see foreign direct investment inflows of $3 billion, according to the Khaleej Times.
"I am confident at this juncture that the UAE and Qatar will be upgraded to Emerging Markets status by the MSCI this coming June, with affirmative action taking place across regional markets. It remains a priority that both the UAE and Qatar continue to attract institutional foreign investment to provide enhanced stability for region," Peter Gotke, vice-president and Head of GCC Depositary Receipts at BNY Mellon, in an interview with the Khaleej Times.
GULF will not be the only Middle East ETF in focus over the next few days, though it is worth noting that the WisdomTree offering has a 7.75 percent weight to Morocco, a country that MSCI could demote to frontier status from emerging.
The Market Vectors Gulf States Index ETF (NYSE: MES), which like GULF is small in terms of assets under management, devotes 57 percent of its weight to the UAE and Qatar. Perhaps it is reading too much into things, but it is worth noting that on a dismal day for emerging markets ETFs, MES traded higher by 0.6 percent on volume that was more than seven times its daily average and that is not the first time the ETF has seen a volume surge in advance of the MSCI decision.
In the past five days, MES has gained 1.2 percent. Coincidentally, five days ago Bloomberg reported that Qatar is taking efforts to boost foreign ownership limits, currently capped at 25 percent, in its companies.
Qatari officials did not say as much, but it is clear the move to further open its markets to foreign investors is, at least in a small way, aimed at earning the emerging markets promotion it covets.
The PowerShares MENA Frontier Countries Portfolio (NASDAQ: PMNA) could use a bit of good news. The ETF has a combined 52 percent weight to the UAE and Qatar, but is hindered by an almost 16 percent allocation to volatile Egypt. Still, simple math dictates that Qatar and UAE mean more to PMNA than Egypt.
HSBC said last month that if the countries gain emerging markets status, investors could soon pour $370 million in UAE and $430 million into Qatar. If Qatar becomes an emerging market in the eyes of MSCI, it will be the lone OPEC member in the MSCI Emerging Markets Index.
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