Saudi Arabia ‘Emerging’ from Frontier With New ETF

Tony Sagami

As the son of a poor dirt farmer, I never cease to be amazed by all the places in the world that my research takes me to.

About the only place I’ve never traveled to is the Middle East … but that may change soon.

Saudi Arabia is the Middle East’s largest, most-prosperous and least-volatile economy. The Saudi economy is thriving — growing by an average of 6.4% over the last four years and is still firing on all cylinders.

The International Monetary Fund has even called Saudi Arabia one of the best performing G-20 economies.

U.S. investors haven’t had much opportunity to get in on the action. That is, until now …

The World’s Second-Largest

Market is About to Get Bigger

The Saudi Arabian government announced that it will finally open up its stock market to foreign investors.

"The market will be open to eligible foreign financial institutions to invest in listed shares during the first half of 2015, with God’s permission."

Before you say "who cares," the Saudi stock market has been a very rewarding place to invest.

The Tadawul All-Share Index was up 17% for the first half of the year, and its $530 billion stock market (which is twice as large as the Israeli stock market) includes some very profitable oil, construction, insurance and banking companies.

The Saudi stock exchange has 160 listed companies, the most of any country in the Middle East, and is headlined by:

  • Saudi Basic Industries, the world’s largest oil producer.
  • Kingdom Holding Company, the investment vehicle of billionaire investor Prince Alwaleed bin Talal al Saud.
  • Al Rajhi Bank, the largest Islamic lender in the region.

Saudi stocks are reasonably valued. The Tadawul All-Share Index trades at 14.8 times forward earnings, much cheaper than U.S. stocks.

The Saudi market is quite liquid, too, trading an average of $2.5 billion worth of shares a day.

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Additionally, the Saudi Arabian currency, the riyal, is pegged to the U.S. dollar. So, there is minimal currency risk.

Emerging from the Frontier

The reason for the opening is that Saudi Arabia wants to attract more international investment, reduce its dependence on oil revenue and move beyond its current classification as a frontier (or, pre-emerging) market.

Frontier markets, however, have proven to be rewarding as many enjoy rapid economic growth fueled by natural resources and young populations with increasing spending power.

(Earlier this year, we talked about how Goldman Sachs and Templeton saw big money moving into their frontier funds.)

Frontier markets encompass a population base of 1.2 billion people and account for 22% of the world’s population.

However, frontier markets only represent 3% of the world’s market capitalization.

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22% of the world’s population is a lot of people, but that number is rapidly increasing.

According to the United Nations, one-third of the world’s population will live in frontier economies. And this number will rise to just under half of the global population within a century.

The Cream of the Frontier-Market Crop

Most investors ignore frontier markets, but I think that’s a mistake. Saudi Arabia, in particular, is the cream of the frontier market crop because of its rich, rich oil deposits.

The easiest way to get Saudi Arabia exposure is with Exchange-Traded Funds. Three ETFs to consider are:

  • The iShares MSCI Frontier 100 ETF (NYSE:FM)
  • Market Vectors Gulf States Index ETF (MES)
  • WisdomTree Middle East Dividend Fund (GULF)

None of the above are pure Saudi Arabia plays, but again, this may change soon.

ETF giant Global X has filed an application with the SEC to create the Global X MSCI Saudi Arabia ETF.

This will be the first Saudi Arabia-focused ETF, and one that is worth your consideration.

We do live in a small world — both as travelers and investors. And even if may never travel to Saudi Arabia, maybe a portion of your investment portfolio should.

Best wishes,

Tony Sagami

Your thoughts on “Saudi Arabia ‘Emerging’ from Frontier With New ETF”

  1. What an epic tragedy this article. First off, Saudi Arabia is classified as a standalone market., not frontier or emerging. Second, there is no Saudi Arabia ETF, so your headline is misleading. Third, of the four ETFs you’ve mentioned here, only MES features any type of direct Saudi exposure. Fourth, proving you did no fact-checking or research, PMNA was closed. The ETF doesn’t exist anymore.

  2. “However, frontier markets only represent 3% of the world’s market capitalization. (To compare, emerging markets represent 42% of the world’s market cap.)”

    When North America + Europe >80%, …
    … could it be, that, with all the printing, sum of world market caps %. >100 is allowed 🙂

    Best regards

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