Saudi Arabia ETF Rallies After Country Gains Emerging Markets Status

Broadly speaking, single-country emerging markets exchange traded funds are delivering plenty of disappointments this year, but there are some exceptions. One of the most notable is the iShares MSCI Saudi Arabia ETF KSA.

While the MSCI Emerging Markets Index is down more than 10 percent year-to-date, KSA, the only U.S.-listed ETF dedicated to Saudi stocks, is higher by about 21 percent. That easily makes the Saudi Arabia fund one of the best-performing single-country ETFs this year.

What Happened

A significant portion of KSA's year-to-date bullishness is attributable to anticipation of index provider MSCI lifting Saudi Arabia into the emerging markets classification, something that was made official last month. That makes Saudi stocks eligible for inclusion in the widely followed MSCI Emerging Markets Index, among other benchmarks.

“Investor interest in Saudi Arabia may be at an all-time high following MSCI's Emerging Market Index inclusion announcement and ahead of the upcoming Saudi Aramco IPO and Vision 2030 reform agenda,” according to BlackRock. “Global exchange traded product flows into Saudi Arabian equities have seen a meaningful increase; should the MSCI EM Index inclusion proceed, further inflows could result.”

Why It's Important

KSA follows the MSCI Saudi Arabia IMI 25/50 Index and holds 72 stocks. While Saudi Arabia is a new entrant to the emerging markets fray, it will eventually become a fairly important part of the MSCI Emerging Markets Index, an index to which trillions of dollars in global assets are benchmarked.

“The index inclusion comes amid ongoing market reform efforts, particularly around improved market structure,” said BlackRock. “The total 2.6-percent weight would make Saudi Arabia the eighth-largest EM market, however further IPOs of state-owned entities, like Saudi Aramco, could raise the index weight even higher.”

The initial 2.6-percent allocation to Saudi stocks will occur in two tranches, the first in May 2019 and the second in August 2019.

What's Next

While Saudi Arabia is the largest member of the Organization of Petroleum Exporting Countries, energy is not one of KSA's largest sector weights — though that could change with the Aramco IPO. KSA devotes about 75 percent of its weight to the financial services and materials sectors.

“Global ETPs focused on Saudi Arabia have seen their assets under management increase by nearly 15 times this year after gathering over $225 million year-to-date,” according to BlackRock. “We believe a supportive macro backdrop, ongoing reform efforts and substantial interest in the Saudi Aramco IPO — which will be only locally listed in Saudi Arabia — are likely to continue underpinning strong and persistent flows.”

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