In the ETF world, the Middle East has often been ignored. But going by current trends, it does not seem so any more with the second filing focusing on this region in the past month.
A few weeks back, Global X had filed for a Gulf-focused fund, the MSCI Saudi Arabia ETF (ticker symbol still undecided), and now iShares, the world’s leading ETF provider, has filed for two funds focused on the Middle East too.
While one of the iShares funds is focused on the United Arab Emirates (UAE), the other has Qatar as its emphasis. This is the first time that iShares is venturing into the Middle East outside of Israel.
Though some key information, including expense ratio and holdings were not released, we have highlighted some of the main points below.
The Proposed Funds in Focus
As per the recent SEC filing, both the proposed products – iShares MSCI UAE Capped ETF and iShares MSCI Qatar Capped ETF – are passively managed exchange traded funds though the sponsor has not yet decided on the ticker symbols.
The MSCI UAE Capped ETF seeks to match the performance and yield of the MSCI All UAE Capped Index before fees and expenses. This benchmark looks to give exposure to publicly traded companies that are classified in the UAE, according to the MSCI Global Investable Market Indices methodology, as well as domiciled and listed in UAE.
MSCI Qatar Capped ETF seeks to track the MSCI All Qatar Capped Index. Like the above mentioned fund, this index too uses the same strategy to select stocks based in Qatar.
The underlying indices of both the funds seek to have primary exposure to companies from the energy, financials and industrials sectors. The funds will include stocks from the entire spectrum of market capitalization.
How Might this Fit in a Portfolio?
If approved, the above mentioned ETFs will give investors an interesting choice to invest in the Gulf.
Last year, both UAE and Qatar have been upgraded by the MSCI from frontier markets to emerging market status. These nations will be joining the index from June this year. The upgrade is expected to be highly beneficial for the equity markets in this region as they are likely to see huge capital inflows.
Also, the low interest rate environment prevailing in this region is expected to bode well for economic activity. As per IMF, both Qatar and UAE are expected to clock above 4% growth this year.
Competition
The funds are likely to face competition from Market Vectors Gulf States Index ETF Fundamentals (MES) and WisdomTree Middle East Dividend Fund (GULF).
Though not fully invested in the UAE and Qatar alone, both the above mentioned funds have decent exposure to these Gulf States.
MES invests more than one-third of its total fund assets in UAE, while having 24.3% exposure to Qatar. On the other hand, GULF has the highest exposure to Qatar (31.58%), followed by UAE (26.49%). All the same, the funds have more than half of their assets invested in Qatar and UAE combined.
MES charges 99 basis points as fees, higher than the 88 basis points charged by GULF. The financial sector occupies almost half of the total fund assets for both the funds.
Unlike the U.S., Gulf markets have performed quite well so far this year. Both MES and GULF have added over 8% in 2014.
However, both the funds have a small asset base. While GULF manages close to $31 million, MES has an AUM of $20 million.
Given the competition in the space, it may be difficult for iShares to build up assets at the beginning with its new ETFs, though if these Gulf States can continue to outperform some risk-tolerant investors might show some interest in these niche country funds, should they pass regulatory hurdles.