The iShares MSCI Saudi Arabia ETF KSA, the only exchange traded fund listed in New York dedicated exclusively to Saudi Arabian equities, jumped 2.13 percent Monday on volume that was nearly eight times the daily average.
That extends KSA's year-to-date gain to almost 11.6 percent, indicating global investors are comfortable betting on Saudi stocks ahead of an important announcement from a major index provider regarding the kingdom's market classification. Later this week, FTSE Russell, one of the largest providers of benchmarks for use by ETF issuers, will decide whether to move Saudi Arabia into its emerging markets indexes.
KSA does not follow a FTSE index. The ETF tracks the MSCI Saudi Arabia IMI 25/50 Index, but an affirmative decision on the kingdom's emerging markets status by FTSE — something the index provider rebuffed last year — could pave the way for rival MSCI to make a similar move later this year.
Kind Of A Big Deal
Saudi Arabia is a member of the MSCI GCC Countries Index, according to MSCI. If FTSE approves the country for an emerging markets promotion, Saudi stocks could eventually be included in the Vanguard FTSE Emerging Markets ETF VWO, the largest emerging markets ETF. VWO tracks a FTSE benchmark.
“An announcement from the index compiler is due on March 28, the first of two decisions that will potentially put the kingdom on the radar of fund managers, investors say,” reported Bloomberg. “MSCI Inc. will provide the second in June, with a positive outcome setting the stage for a planned initial public offering of shares in Saudi Aramco, expected to be the biggest ever and key to a series of reforms taking place in Saudi Arabia."
If MSCI stamps Saudi Arabia as an emerging market, that would open the door for Saudi equities to join the widely followed MSCI Emerging Markets Index. Approval from FTSE could lure $5 billion in passive fund investments to Saudi equities, Bloomberg reported, citing EFG-Hermes Holding.
Investors Look Convinced
While KSA debuted in September 2015, the ETF has until recently failed to gain traction with U.S. investors. That scenario is changing. As of March 23, KSA had $115.1 million in assets under management, nearly $96 million of which has flowed into the fund just this year.
KSA holds 75 stocks, about 71 percent of which come from just two sectors: financial services and materials.
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Todd Shriber owns shares of VWO.
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