FM’s Recent Performance Concerns
Currently, more than 55 percent of FM is weighted in just three Gulf states: Kuwait, Qatar and the United Arab Emirates.
I’ve had mixed feelings about FM’s concentration to the Middle East.
On the one hand, FM’s strong performance can be attributed to the Gulf states, where local stock markets have been on a tear over the past year.
Just look at the returns of Qatar and UAE over the past year:
On the other hand, being too concentrated in one region can work against you if the tide turns on that region. Additionally, if I wanted to play the Gulf states, there are two pure-play ETFs already: the $68 million WisdomTree Middle East Dividend ETF (GULF | F-91) and the $29 million Market Vectors Gulf States ETF (MES | F-68).
I also wonder how much of this performance has been attributed to anticipation of Qatari and UAE securities being included in the $36 billion iShares MSCI Emerging Markets ETF (EEM | B-100).
Looking ahead, I only hope investors chasing returns and piling into FM at the moment don’t have unrealistic expectations post-transition.
As expected, MSCI is tweaking its methodology.
For starters, it’ll cap the top two countries at 40 percent combined, in order to stop Kuwait (and Nigeria) from having a disproportionate weighting once UAE and Qatar are taken out.
The new FM will also pull its constituents from the MSCI Frontier Markets Investable Market Index (IMI), which includes small-caps. The new methodology also allows the index constituents to fluctuate between 85 and 115 holdings.
Here’s a comparison of country weightings pre- and post-transition (estimated):