(Bloomberg) — Like a game of Risk, the entire world is slowly but surely getting wrapped up by U.S. exchange-traded fundissuers.
The IShares MSCI Saudi Arabia CappedETF(KSA), which is expected to launch on Thursday, will provide U.S. investors access to a basket of locally listed Saudi stocks. No other U.S.ETFor mutual fund has any significant exposure to Saudi Arabia, which makes this one of the most anticipated newETFlaunches of the year.
Such afund was not even possible until June, when Saudi Arabia opened up to direct foreign investment, albeit limited, in its stock market to boost economic growth while the country looks to diversify its $750 billion economy away from oil. Similar to the China A-share market, KSA gives quick access to a market that was previously accessible only by using indirect, costly channels.
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TheETFwill track the MSCI Saudi Arabia IMI 25/50 Index, which holds about 50 large-, mid-, and small-cap stocks that cover approximately 99 percent of the free float-adjusted market valueof Saudi Arabia.
One interesting note is that while the index has 30 percent allocated to both financials and materials, it has only 1.4 percent allocated to energy stocks, as seen in the chart below. While this may seem a microscopic weighting for a country in whichoil exports make up half of its gross domestic product, it makes perfect sense when you consider that Saudis oil production is state-owned and not publicly traded.
Buoyant interest from foreign investors is viewed as a first step toward liberalization for the Saudi stock market and-as with Chinas A-share market-could eventually mean inclusion in the MSCI Emerging Markets Index, which has about $1.7 trillion worth of assets benchmarked to it. Saudi Arabia could be included as early as June 2017 and it would getaround a 2 percent weight, according to a Wall Street Journal report. That means a potential $34 billion in future demand for the stocks.
Despite that case for long-term bullishness, the past 12 months havebeen horrible for Saudi Arabia’s stocks. The slump in oil has hit the country especially hard. The index theETFtracks is down 27 percent, as seen in the chart below. That’s even more than the 24 percent by which the broad emerging markets have fallen.
Launching anETFduring an long, abysmal market run is unusual for anETFissuer. Ordinarilythey are launched after good returns, which can result in ETFs stumbling after their launch. KSA certainly stands out in that regard.
KSA will be the 220th single-countryETF. These have $100 billion in assets and are used as a convenient way to access a foreign market. Thatcan otherwise be logistically difficult, even for institutions, because they wouldneed brokerage accounts and custodians in any givencountry. Prior to the ETFs, many institutions would enter into total return swaps with banks for various fees. Retail investors pretty much had no way to do it.
In exchange for access to Saudi Arabia, KSA will charge .74 percent in annual fees. Thisis expensive when compared to the averageETF, but it’s about average for a single country exposure. A fair comparison would be the Deutsche X-trackers Harvest CSI 300 China A-SharesETF(ASHR), which charges .80 percent.
EricBalchunasis an exchange-traded-fund analyst at Bloomberg.
