What Saudi Arabia’s Market Liberalization Means for ETFs

ETF Trends

One of the biggest, if not the biggest, news items from emerging markets on Tuesday came courtesy of Saudi Arabia. Saudi stocks surged to six-year highs after the largest OPEC producer and Gulf Cooperation Council (GCC) member said it will open its equity market to foreign investors by the middle of 2015.

“Saudi Arabia’s cabinet authorized overseas financial institutions to trade equities in the Tadawul and gave the Capital Market Authority scope to determine the timing,” Bloomberg reported, citing the Saudi Press Agency.

The total market value of Saudi Arabia’s equity markets is $531 billion, or about $40 billion less than Apple’s (AAPL) market cap at Tuesday’s close. However, the Saudi equity market is three and a half times larger than those of Israel and the United Arab Emirates, of which there are three country-specific ETFs: The new iShares MSCI UAE Capped ETF (UAE) , the iShares MSCI Israel Capped ETF (EIS) and the Market Vectors Israel ETF (ISRA) . [UAE, Qatar ETFs Debut]

Speaking of Saudi Arabia and ETFs, the country has steps to take before its presence is felt in ETFs that benchmark to MSCI indices. The index provider currently does not classify Saudi Arabia as an emerging or frontier market, however it is a member of the MSCI GCC Countries Index, according to MSCI.

That means MSCI would need to create an MSCI Saudi Arabia Index before the country can even be considered for entry into well-known indices such as the MSCI Emerging Markets Index or the MSCI Frontier 100 Index.

“The potential opening up of the market to foreign investors could lead to the creation of a MSCI Saudi Arabia Index and its potential inclusion in a major composite index, e.g., MSCI Emerging Markets Index,” said MSCI Global Head of Index Management Sebastian Lieblich in an email to ETF Trends.

That means Saudi Arabia’s equity market is a long way from being on par with its rivals in Qatar and UAE, at least in terms of market classification. Those markets became the first in the Middle East to earn a promotion from MSCI to emerging markets status from the frontier classification. [Changes Could Help Frontier ETF]

Entry into the popular iShares MSCI Frontier 100 ETF (FM) is not likely to happen in the near-term for Saudi Arabia, but investors looking for some Saudi exposure have ETF options. The Market Vectors Gulf States Index ETF (MES) traded modestly higher on Tuesday following news of the kingdom’s market liberalization plans.

MES has long provided Saudi exposure because the Market Vectors GDP GCC Index (MVMESTR), the ETF’s underlying index, allows for the inclusion of companies that derive over 50% of their sales from a target country. At the close of trading Monday, two members of the Market Vectors GDP GCC Index, a combined, 4.63% of the index’s weight, had Saudi exposure, according to Market Vectors.

Both Market Vectors and Global X have filed plans for single-country Saudi Arabia ETFs though neither fund has come to market. The $29.5 million MES is up 19.5% year-to-date.

Market Vectors Gulf States Index ETF

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Tom Lydon’s clients own shares of Apple.

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