Middle East ETFs: Watch Your Financials Weight

by on March 7, 2013 | ETFs Mentioned:

Emerging markets exposure has become a staple in countless portfolios over the past few years as the proliferation of ETFs has democratized previously difficult-to-reach segments of the global market. While many have shed their home country bias, diversifying your portfolio geographically remains a hurdle for investors who remain hesitant to dip their toes overseas. On the other hand, those that have taken the plunge have reaped the benefits of a well-balanced portfolio; in many instances, investors who have tapped into markets outside of the more popular BRIC group have realized stellar, and often uncorrelated, gains over the past few years [see 101 ETF Lessons Every Financial Advisor Should Learn].

Investment opportunities in the Middle East in particular have been flying under the radar for most, as this region of the world has largely been inaccessible by mainstream investors in the last decade. Luckily, the growth of the ETF universe has spawned several options for those looking to gain exposure to the thriving economies of the Middle East, which boast a growing presence on the global economic stage [see Free ETF Country Exposure Tool].

Depth, Financials Allocation Play Big Roles

As with any financial instrument, it’s worth noting that Middle East ETFs have a host of nuances that investors need to thoroughly consider before establishing a position. Perhaps the biggest misconception about this breed of funds is that they are heavily tilted towards energy companies given the oil-centric economies of BahrainJordan, Kuwait, Oman, Qatar and the United Arab Emirates. A closer look under the hood, however, reveals that each of the broad-based Middle East ETFs is in fact more heavily concentrated in the financials sector. This characteristic will obviously have a notable impact on the risk/return profiles of these funds, and can materially impact the composition of an overall portfolio [see also Financials Free ETFdb Portfolio].

The table below compares the financial allocation and number of total holdings among each of the broad-based Middle East ETFs, revealing significant differences between them:

  • iShares MSCI Israel Capped Index Fund (EIS, B-)
  • SPDR S&P Emerging Middle East & Africa ETF (GAF, B-)
  • WisdomTree Middle East Dividend Fund (GULF, B)
  • Market Vectors Gulf States (MES, B)

It’s important to remember that there’s no universally right choice from the above ETFs. For some investors, a financials-heavy ETF makes sense; for others, a more balanced and deeper portfolio might be the way to go.

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Disclosure: No positions at time of writing.