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Why Money Is Flowing Into This Country ETF

ETF Professor

The Global X MSCI Pakistan ETF (NYSE: PAK) is up 8.3 percent year-to-date, a solid performance among the single-country exchange traded funds dedicated to nations classified as frontier markets.

PAK: Purely Pakistan

However, Pakistan will not be a frontier market for long and the country's widely known and imminent promotion to the MSCI Emerging Markets Index is perhaps one reasons why investors have flocking to PAK and Pakistani stocks.

“The biggest gains were seen on Tuesday as foreigners bought the most shares in a single day in 2017. This is only the fourth time this year that the country has seen net buyers on its holding. The sentiment remains optimistic and can be directly linked with the country regaining the emerging status on MSCI’s index,” according to PakWired.com.

PAK's month-to-date inflows stand at nearly $12 million, an impressive percentage of the ETF's $48.4 million in assets under management as of May 24, according to issuer data.

Pakistan Retains Emerging-Market Status

When index provider MSCI conducts its annual market classification in June, Pakistan will regain its emerging market status, which the country lost in 2008. Pakistan is the first country since Qatar and the United Arab Emirates in 2013 to be elevated from frontier markets to emerging markets status.

With Pakistan joining the MSCI Emerging Markets Index, passive funds that allocate to that benchmark will have to add the corresponding exposure to Pakistani exposure while some active fund managers that try to beat the emerging markets benchmark are likely to add some Pakistan exposure as well.

Pakistan's exit from frontier territory means a significant change for the iShares MSCI Frontier 100 ETF (NYSE: FM), the largest frontier markets ETF. Currently, Pakistan accounts for 11.3 percent of FM's weight, making the country that ETF's third-largest geographic allocation behind Argentina and Kuwait.

“The benchmark KSE100 Index registered gains over seven of the eight years since Pakistan’s downgrade to frontier market in 2008. The balance of payment crisis was averted with the help of the International Monetary Fund, and loans from China. The funds value has jumped 46 percent last year, Asia’s best performance, and headed for a fresh record on Thursday,” according to PakWired.

Like many single-country ETFs tracking frontier markets, PAK is heavily allocated to financial and commodities-related sectors. Financial services is PAK's largest sector weight at about 33 percent while materials and energy stocks combine for over 46 percent of the fund's weight.

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