David Fry: When an investor’s thinks about the Middle East, there’s no doubt one thing that looms large in their mind: oil. Oil (NYSEARCA:USO) makes the world go round, and the Middle East is awash in it. And while it’s true that a great many Middle Eastern nations depend on oil (NYSEARCA:DBO) for their livelihoods, you wouldn’t know it from looking at some Middle Eastern ETFs’ holdings. For the most part, this is thanks to most Middle Eastern oil companies being in state hands. They don’t trade on any stock exchanges, so investors can’t buy a piece of them.
For the purposes of this article we’ll be taking a closer look at two Middle Eastern ETFs: The Market Vectors Gulf States Index ETF (NYSEARCA:MES), and the WisdomTree Middle East Dividend Fund (NASDAQ:GULF).
Both of these ETFs attempt to provide exposure to Middle Eastern countries, but go about it in slightly different ways. They see pretty light average daily volume (3,937 for MES, 5,956 for GULF) and have low net assets ($13.72 million for MES, $13.96 million for GULF).
MES attempts to replicate “the performance of the Dow Jones GCC Titans 40 Index (DJMEST).” This index “measures leading stocks traded in the Gulf Cooperation Council member countries of Bahrain, Kuwait, Oman, Qatar, and the United Arab Emirates.” Conspicuous in its absence from this fund is, of course, Saudi Arabia, the nation with by far the largest proven oil reserves in the world.
Moreover, considering this is the Middle East we’re talking about, MES has a miniscule 6.5% sector allocation in Energy. Instead, it is extremely concentrated in Financials (a whopping 66.5%), with its number two and three holdings in Telecommunication Services (13.5%) and Industrials (9.9%) respectively. Its top three country allocations are Kuwait (35.5%), Qatar (29.9%), and the United Arab Emirates (23.8%), and account for nearly 90% of the entire fund. Its expense ratio is quite high, at 0.98%.
GULF takes a slightly different approach. It tracks the WisdomTree Middle East Dividend Index, which “measures the performance of companies in the Middle East region that pay regular cash dividends on shares of common stock” and that “have their shares listed on a major stock exchange in Bahrain, Egypt, Jordan, Kuwait, Morocco, Oman, Qatar, or the United Arab Emirates.” Again, Saudi Arabia is nowhere to be found.
It is less concentrated in Financials but still heavily allocated at 44.63%. Its 2nd and 3rd heaviest sector allocations are Telecommunications (33.64%) and Industrials (13.5%). Again, as in MES, there is a counter-intuitively tiny allocation to energy in this fund, with just 2.26%. GULF’s chief aspect that sets it apart is its focus on dividends and its lower expense ratio, as well as its lower concentration (though still high) in one sector.
All of this isn’t to say that these Middle Eastern ETFs have nothing to do with oil. You can bet that a lot of that oil money still makes its way into these countries’ economies, but as long as the oil companies there remain in state hands, these ETFs can only provide an indirect exposure.
Although they follow different allocation methodologies, MES (blue) and GULF (red) are highly correlated.
David is founder and publisher of ETF Digest and best selling book author of Create Your Own ETF Hedge Fund, A DIY Strategy for Private Wealth Management published by Wiley Finance in 2008. In July of 2009, Fry was named in the ETF Hall of Fame as one of the Top 25 people who revolutionized the ETF industry and guided ETF investing from its conception to widespread acceptance among all breeds of investors. Fry founded the ETF Digest in 2001 and was among the very first to see the need for an online publication that provided individual investors and financial professionals with trading tools, market information and actionable advice on ETF investing. ETF Digest was recently ranked 9th in the Top 100 ETF websites from Alexa on exchange traded funds. Dave Fry has devoted over 35 years to the business of trading and portfolio management. He is registered as an arbitrator with the Financial Industry Regulatory Authority (FINRA) and the National Futures Association (NFA).