How to Play Middle East's New EM Status With ETFs
Earlier this week, index provider MSCI (NYSE: MSCI) announced its annual market reclassification and the news can be broken down three ways. There was some surprise, though arguably not much, and subsequent fallout for the relevant ETFs after Greece was demoted to emerging markets status and it was revealed that Egypt could be bumped down to frontier status in the future.
Then there was the not surprising/bland news that MSCI will keep South Korea and Taiwan as emerging markets. At least until next year's market reclassification.
The good news is that Qatar and the United Arab Emirates, as some suspected would happen, were elevated to emerging markets from frontier status. That means when MSCI conducts its semi-annual index review in May 2014, the countries will be included in the widely followed MSCI Emerging Markets Index Fund.
What is important is that ETFs that track that index will not suddenly become Qatar/UAE-heavy. In fact, MSCI told Reuters on Wednesday that Qatar will get a weight of 0.45 percent in the MSCI Emerging Markets Index while UAE will receive an allocation of 0.4 percent. A reasonable theory is that there will be less than 15 stocks combined from the two countries when they first enter the index.
That situation means investors that are looking for access to Qatar and UAE stocks via ETFs need to look elsewhere for satisfactory weights starting with the...
WisdomTree Middle East Dividend Fund (NASDAQ: GULF)
The WisdomTree Middle East Dividend Fund needs to be included on this list not just because of its combined 66 percent weight to UAE and Qatar, but also because the ETF has the right sector mix. As is the case with many ETFs tracking developing world economies, GULF is heavy on financial services stocks with that sector occupying almost half the ETF's weight.
In this case, GULF's significant weight to bank stocks could be a good thing. Remember all the consternation about Russian deposits in Cyprus when the latter was on the brink of financial ruin? Well, Russian cash is flowing into UAE. So is Chinese and Indian capital as well. Citing an Invesco Study, Trade Arabia reports 43 percent of private capital flowing into the UAE was from emerging markets including 15 percent from India, 10 percent from Russia, and 7 percent from China, while just 13 percent came from developed markets.
PowerShares MENA Frontier Countries Portfolio (NASDAQ: PMNA)
The PowerShares MENA Frontier Countries Portfolio allocates 53 percent of its weight, combined, to UAE and Qatar and nearly two-thirds of the ETF's weight goes to financial services stocks. The almost 23 percent weight to Qatar is significant because the country recently took action to lift foreign ownership limits on its major exchanges.
Increased foreign ownership limits in Qatar, now the lone OPEC member with emerging markets status, are significant because stocks listed on the Qatar Exchange have a combined market value of just over $140 billion. Said another way, Apple's (NASDAQ: AAPL) cash pile is roughly that of the combined market value of listed Qatari firms.
As it pertains to PMNA, lifting of foreign ownership limits at firms such as Qatar International Islamic Bank and Qatar Islamic Bank, two of the ETF's holdings, could generate additional interest in what is still a small ETF (just $15.6 million in assets).
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