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Another Avenue To The Kingdom

ETF Professor

Saudi Arabian stocks are into a second year of being among the best performers in the developing world. Stocks there are rallying on the back of recent announcement by index provider MSCI that when Saudia equities join the MSCI Emerging Markets Index later this year, the country will have a pro-forma weight in that benchmark of 2.6 percent.

What Happened

Last year, MSCI elevated Saudi stocks to emerging markets status, saying it will include companies residing in the MSCI Saudi Arabia IMI 25/50 Index in the MSCI Emerging Markets Index in a two-step inclusion process that starts this June.

Among exchange traded funds, one of just two dedicated Saudi Arabia ETFs listed in the U.S. is the iShares MSCI Saudi Arabia ETF (NYSE: KSA). For investors that want exposure to Saudi stocks without the commitment of a country-specific ETF, the WisdomTree Middle East Dividend Fund (NASDAQ: GULF) is an option to consider.

Why It's Important

GULF has a 28.48 percent weight to Saudi stocks, by far the largest weight to the country among ETFs that are not Saudi-specific funds. GULF is up 11.19 percent this year and there could be more upside in the fund and Saudi stocks because data indicate investors are still under-allocated to those equities.

A recent article in the Financial Times, citing data from Copley Fund Research, indicates the average emerging markets fund has Saudi Arabia exposure of just 0.08 percent and 90 percent of those funds have no exposure to the kingdom at all. Remember, it was 10 months ago that MSCI said it's elevating Saudi Arabia to the emerging markets index.

“Hold the phone. MSCI announced this last summer, not yesterday,” said WisdomTree in a recent note. “FTSE Russell and Standard & Poor’s are following suit. Everyone knows the index providers are the big gorillas. What, pray tell, have those 180 managers been doing all day?”

What's Next

Given the performances of KSA and GULF this year, it's clear some fund managers and foreign investors are buying Saudi stocks ahead of the June MSCI inclusion.

“Only now is the Tadawul All Share Index of Saudi stocks breaking out,” said WisdomTree. “June’s MSCI index inclusion won’t be wished away.”

GULF has the added benefit of a dividend yield of 3.74 percent compared to 2.17 percent on KSA.

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