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Why The Saudi Arabia ETF Is Soaring

ETF Professor

Amid speculation that some stocks in Saudi Arabia would be added to the MSCI Emerging Markets Index, the iShares MSCI Saudi Arabia ETF (NYSE: KSA) was one of 2018's best-performing single-country exchange traded funds.

What Happened

Last year, MSCI decided to promote stocks in the MSCI Saudi Arabia IMI 25/50 Index, KSA's underlying benchmark, to the MSCI Emerging Markets Index, rewarding investors that owned the ETF prior to that announcement.

KSA, the only U.S.-listed ETF dedicated to Saudi stocks, is following on its 2018 bullishness. The fund is up 16.16 percent year to date after hitting another all-time Tuesday. KSA is beating the aforementioned MSCI Emerging Markets Index by nearly 500 basis points this year.

Why It's Important

MSCI's two-step inclusion process of KSA components in the MSCI Emerging Markets Index commences in June.

“Saudi Arabia’s inclusion in the emerging markets (EM) index may provide expansion of the investment opportunity set, and the country has previously demonstrated diversification benefits,” said the index provider. “These include the market’s past dividend yield, its distinct sector composition, low sensitivity to other emerging markets and its previous natural currency hedge.”

The $411.85 million KSA devotes more than 44 percent of its weight to the financial services sector and 31.65 percent of its weight to materials stocks.

What's Next

“On a pro forma basis, the MSCI Saudi Arabia IMI will represent approximately 2.6% of the MSCI Emerging Markets IMI (which includes small-cap stocks) and will add 69 securities to the latter index,” said MSCI. “There will be a two-step inclusion process, at the May and August Semi-Annual Index Reviews.”

A weight of 2.6 percent in the MSCI Emerging Markets means Saudi Arabia will command a larger percentage of that benchmark than any other Arab country and tie Mexico for the eighth-largest weight in the widely followed emerging markets index.

At 2.6 percent, Saudi Arabia's weight in the MSCI benchmark will exceed those of Thailand, Indonesia, Poland and Chile, among others.

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