These ETFs Could Endure An Oil Slide
The caveat here is “maybe” the following exchange-traded funds could endure an oil shock, though past performance indicates it will be difficult.
After all, the iShares MSCI Saudi Arabia Capped ETF (NYSE: KSA) and the iShares MSCI Qatar Capped ETF (iShares Trust (NASDAQ: QAT)) are two single-country ETFs dedicated to equities in nations that are members of the Organization of Petroleum Exporting Countries (OPEC). Knowing that, it can be hard to argue that these ETFs would perform well if oil prices decline.
Oil, KSA And QAT
When oil prices declined in 2014 and 2015, QAT, which debuted in April 2014, did not perform well. KSA, the first ETF dedicated to stocks in Saudi Arabia, launched in September 2015, and has struggled in the low oil price environment. That despite the fact that major oil producers in countries like Qatar and Saudi Arabia are not members of the relevant of ETFs' lineups.
These ETFs are heavily allocated to financial services stocks, which is an important factor to consider even if oil prices decline.
“Banks in Saudi Arabia and Qatar are better placed than Gulf Cooperation Council (GCC) peers to cope with an eventual deterioration in asset quality brought about by a prolonged period of weak oil prices,” said Fitch Ratings in a recent note.
Exposure To Financials
KSA allocates 28.5 percent of its weight to financial services stocks, the ETF's second-largest sector weight behind a 36.8 percent weight to materials.
QAT's weight to bank stocks is even more significant. The Qatar ETF allocates nearly 63 percent of its lineup to financials, more than quadruple the ETF's second-largest sector weight. In fact, QAT's largest holding, Qatar National Bank, commands nearly 21 percent of the ETF's weight.
“The operating environment is a positive ratings factor for banks in Saudi Arabia, Qatar and the UAE. In our view, business opportunities are strongest in Saudi Arabia and the UAE, reflecting the countries' larger and more diversified economies. In Qatar, we are not expecting any significant cuts to government spending and numerous government-sponsored projects continue to provide profitable, low-risk, lending opportunities for banks,” added Fitch.
There are advantages, particular in QAT's case, of the large exposure to financial services stocks. In many developing economies, banks are big dividend payers. QAT confirms as much with a trailing 12-month yield of 3.6 percent, which is more than 150 basis points above the MSCI Emerging Markets Index.
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