Coming Soon: Norway, UAE, and Pakistan ETFs

by on February 10, 2010 | ETFs Mentioned:

Total ETF assets grew by more than $240 billion in 2009, as funds continued to flow from traditional actively-managed mutual funds and issuers introduced more than 100 new products. Despite some suggestions that the a saturation point is nearing (or has perhaps even been passed), the ETF industry is poised to continue its rapid expansion in 2010, and is on pace to surpass last year’s new product total.

Many of the new funds launched this year have been instant hits, and the pipeline is full of exciting new products (see the Seven Most Anticipated New ETFs of 2010). In a new weekly feature on ETF Database, we take a look at some of the more interesting products currently awaiting approval and launch. First up are three international ETFs offering exposure to hard-to-reach regions of the world, including a frontier, emerging, and developed market.

Global X, the developer of several sector-specific China funds, has filed for several new country-specific funds, continuing its push to develop a line of innovative international funds. Among the most interesting of the batch are funds targeting Norway, Pakistan and the United Arab Emirates. While most details are still not available for these proposed funds, a look at the outline provided in the prospectus of the economies on which they will reportedly focus provides some insights into the risk and return profiles (it should be noted that not all funds for which a prospectus is filed are eventually launched, so it’s entirely possible these ETFs never make it to market).

Pakistan

Pakistan’s economy is heavily dependent on exports, especially from the textile sector which comprises nearly two-thirds of export income. The country does enjoy a relatively friendly relationship with the U.S., and Pakistan has periodically received financing and aid from other countries and multilateral organizations, which helps to boost spending. The country remains a prime location for manufacturing, especially low value-added production, due to its cheap and plentiful labor pool.

However, there are several issues to consider when investing in Pakistan, most notably political instability. The Pakistani population is comprised of diverse religious, linguistic and ethnic groups, and outlying provinces have, from time to time, proved to be resistant to the central government’s control. Recently, acts of terrorism and the armed conflict in the Swat Valley between Pakistani troops and the Taliban have resulted in substantial population displacement and civil unrest. Furthermore, Pakistan, a nuclear power, also has a history of hostility with neighboring countries, most notably India over the disputed Kashmir region. The tensions between the two nations have spiked in the past in the form of armed conflict between the national armies and non-state-sponsored acts of terrorism. Nevertheless, the country remains an interesting investment location due to its large population and strategic location in the world.

Pakistan is classified as a frontier economy. Claymore’s BNY Mellon Frontier Markets ETF (FRN) maintains an allocation of about 0.5% to Pakistan.

Norway

Norway’s economy is heavily dependent on the export of petroleum and metals to key trading partners in the European Union (“EU”), most notably to resource poor nations such as the United Kingdom, Germany and the Netherlands. It seems unlikely that the demand for any of these products to the EU will decrease significantly anytime soon since Norway represents the closest, most political stable nation to provide these goods.

Faced with stronger global competition, Norway has had to scale down its historically generous welfare program, resulting in drops in domestic demand and increased unemployment. Major industries in Norway are heavily dependent on human capital and face pressure as a result of high labor costs. Pension reform, union regulation, and further cuts in liberal social programs will likely need to be addressed in the near future, which may adversely impact the Norwegian economy.

Norway is one of the world’s developed markets, and receives a minor allocation in several European, developed markets, and global equity funds. It also has a significant allocation (about 20%) in the Global X FTSE Nordic 30 ETF (GXF).

United Arab Emirates

The economy of the United Arab Emirates (UAE) is dominated by petroleum exports. However, the non-oil economy, notably in tourism, real estate, banking and re-export trade, has grown rapidly over the past few years. The nation is fast becoming a hub of travel and tourism for the entire region, a benefit most Arab countries do not enjoy.

As the recent global credit crisis and the corresponding fallout in Dubai’s service sector have shown, the UAE remains anchored by Abu Dhabi’s oil production. A sustained decrease in commodity prices could have a significant negative impact on all aspects of the economy of the UAE. Like most Middle Eastern governments, the federal government of the UAE and the governments of the individual emirates exercise substantial influence over many aspects of the private sector.

The recent debt crisis in Dubai has raised concerns about the long-term repercussions of the recent development in the region and the UAE’s role as a de facto guarantor of Dubai’s debt. Although the worst case scenario that many investors had been imagining now seems unlikely, Dubai’s balance sheet will continue to have a major impact on the prospects of the UAE.

The UAE is classified as an emerging market, and is given the largest weightings by PMNA (18%), GULF (16%), and MES (27%).

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Disclosure: No positions at time of writing.