Gulf States ETFs: All Eyes on Iran

by on June 22, 2009 | ETFs Mentioned:

Gulf States ETFs, which had been enjoying sustained rallies in recent months, paused last week as turmoil in Iran intensified and tremendous uncertainty looming over the entire region. While few ETFs on the market maintain any direct holdings in Iranian companies, the fallout over presidential elections held earlier this month threatens to destabilize the entire region, halting a rally that had seen these funds focused on other Gulf states cross into the black for the year. 

Over the weekend, the Wall Street Journal’s Jerry Seib penned an interesting article examining the possible outcomes of the current situation in Iran, none of which are particularly appealing to foreign leaders watching the events unfold. I’m inclined to view Mr. Seib’spossibilities as a bit naive and optimistic, particularly after a weekend of violent clashes between supporters and news Monday morning that some voting irregularities have been uncovered, with the number of votes cast in many regions exceeding the number of voters. Whereas a few weeks ago many (myself included) were optimistic that these elections could usher in broad-based reforms and an easing of international tensions, the most likely scenarios now all involve Ahmadinejad remaining in power, perhaps bolder and more defiant than ever.

Recent Developments

The weekend saw rallies for both candidates continuing throughout Iran, with conflicts between protesters and security forces turning violent on Saturday. State media reported that a bomb rocked the mausoleum of Ayatollah Khomeini, the leader of Iran’s revolution, killing the bomber and injuring three. Perhaps the most disconcerting development was the arrest of Newsweek’s Tehran correspondent, the latest among some two dozen journalists who have been arrested since the start of the protests. The restrictions on Western journalists in the country has made tracking developments within Iran’s borders increasingly difficult, with many reports coming from unverified, nontraditional sources, including social networking sites (although even these have been largely blocked now).

While many foreign nations are likely willing to let Iran attempt to resolve its dispute internally, even as the casualties mount, the government’s crackdowns on free speech and willingness to detain members of the media may ultimately force the hand of the international community and spur intercession. Such a scenario would likely be the worst case for Wall Street.

On Monday, Iran attempted to ease any fears of a production decline, indicating that the post-election rallies had not impacted oil output or crude exports. “The recent developments in the country have had no impact on the oil industry or crude exports. The national oil industry is 100% normal,” Mohammad ali Khatibi, Iran’s governor at the Organization of Petroleum Exporting Countries, was quoted saying on state media. 

Small But Powerful

Despite lack of direct foreign investment, Iran’s abundance of valuable natural resources has caused the unrest in Tehran to ripple across the global markets. Iran, the world’s 18th most populous nation, holds more than 130 billion barrels of proven oil reserves, representing nearly 10% of proven global reserves and making the Islamic republic the third largest holder in the world. Iran also holds the world’s second-largest supply of natural gas reserves, behind only Russia. Whereas crude oil is easily and frequently transported throughout the world, natural gas is more of a local commodity, requiring extensive networks of pipelines to be transported to end-users. Still, dependence on Iran, both regionally and globally, for a meaningful portion of certain resources has focused attention squarely on the volatile region.

Among the funds to watch as the tumult in Iran continues to play out:

  • WisdomTree Middle East Dividend ETF (GULF): With heavy concentrations in Qatar (26.4%), Kuwait (18.4%), and the UAE (16.0%), GULF could get some serious attention from investors if the situation in Iran escalates. While these countries are known as leading oil exporters, GULF has a significant concentration in the financial (43%) and telecom (28%) sectors.

GULF Pulled Back Recently After a Months-Long Rally

  • Market Vectors Gulf States Index (MES): Van Eck’s ETF also has significant holdings in the financial and telecom sectors, and affords significant weighting to Kuwaiti equities in its portfolio. UAE, Qatar, Oman, and Bahrain round out the top five country weightings in MES.

MES Is Up Nearly 10% in 2009

Although they have pulled back slightly over the last week, GULF and MES have held up relatively well considering the happenings in Tehran. While these funds hold heavy concentrations in countries known as traditional oil exporters, their holdings in oil-related companies are very limited, with financial and telecom companies dominating their portfolios. As a result, they likely won’t be significantly impacted by any changes in oil prices or output levels. While a more severe destabilization in the region could wreak havoc on these funds, their lack of dependence on crude oil production affords them unique production from certain regional crises, including the current situation in Iran.