Middle East ETFs Show Opportunities Amid War

Up until recently, Israel’s economy had been on track to grow at about 3.0% this year and 3.4% in 2024, with controlled inflation and an unemployment rate in the low-4% range, according to the Organisation for Economic Co-operation and Development (OECD). 

Then, the Oct. 7 attack by Hamas occurred—an event that has shaken all parties and nations in the Middle East to varying degrees. For Israel, many workers have now been called up for military service. While mandatory for all citizens in their youths, one can still be called up for reserve duty up to the age of 40—and beyond, in cases of national emergency, as in the current situation. And so the country’s economy is now suffering from so many workers being abruptly removed from their jobs to rejoin the military. 

But, as investors know, some of the best long-term growth situations emerge from the most stressful times. Historically, this has been especially true for emerging markets, such as those in Israel, the United Arab Emirates, Saudi Arabia, and other Middle Eastern countries. In other words, a weakening global economy has now been compounded by a headline-dominating struggle in a region filled with a history of confrontation. As the iconic emerging markets investor John Templeton once said, “Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria.” So, if ETF investors are looking around the world for pessimistic market situations to research and consider as contrarians, the Middle East would seem to be an obvious case.

Investors may be wondering if they can even invest in the Middle East through ETFs. The answer, which has been the case for more than 15 years, is a resounding yes. There are currently four ETFs that invest in companies based in Israel, though many such companies are also listed on U.S. stock exchanges; a modest $336 million in assets adds to the appeal for investors who enjoy discovering hidden gems. Two of the ETFs focus on Saudi Arabia, while one ETF is devoted primarily to the high net worth nation UAE. It should come to no surprise that BlackRock’s iShares ETF unit is the leading provider of funds investing in this region.

Finance, Tech, Exposure in Middle East ETFs

To help jump-start your research process, here are some of the ETFs described above.

The iShares MSCI Israel ETF (EIS), which debuted back in 2008, was the first Israel-focused ETF, with $120 million in assets currently. All of EIS’s holdings are traded on Israel’s Tel Aviv Stock Exchange. Like many single-country ETFs, EIS is top-heavy, with the 10 largest holdings comprising 52% of assets, despite the ETF holding 117 stocks total. With an average market capitalization of about $7 billion, EIS is solidly placed in the mid-cap stock range.

One cannot examine the potential for investment in Israel without noting the country has long been the home of innovative world-class technology and biotech firms. The BlueStar Israel Technology ETF (ITEQ) holds $78 million in assets and requires that either at least 20% of a company’s employees or long-term assets be in Israel or that it maintains a major research and development center within the country. The 59-stock ETF is similarly concentrated and has a weighted average market capitalization similar to EIS.

While differences in culture and religion have long been a potential dividing line for Israel and its neighbors, its relationship with the UAE is quite civil. In fact, Israel was on the verge of a major agreement with Saudi Arabia before Oct. 7. Both nations have taken very public steps to strive to become bigger participants in the world economy, which is why a discussion involving this area of the global/emerging markets should include them as well.

The iShares MSCI UAE ETF (UAE) is a small, $36 million ETF that invests in a country that has successfully advanced from being a “frontier” market (emerging toward being an emerging market, we might say) to earning true emerging-market status. The fund holds 41 stocks, 10 of which account for 60% of its assets. Not surprisingly, in a country of extremely high per capita wealth, the financial sector accounts for 60% of UAE. Communications, primarily national telecom stocks, make up another 18%.

As for Saudi Arabia, the Middle East’s largest ETF, the iShares MSCI Saudi Arabia ETF (KSA) has been an assets under management success story. KSA sits just above $700m, despite the fact the country only started allowing foreign ownership of equities eight years ago. And, while the understandable knee-jerk reaction might be to assume KSA is an oil-driven ETF, financials and industrials actually have higher sector weightings, with energy making up only about 8% of the fund.

Before considering any allocations to the Middle East, investors must first understand that not only are these markets far less mature and stable than the U.S. markets, but they can—and will be—subject to greater volatility. EIS, for example, rallied more than 100% on multiple occasions in addition to—not unexpectedly—suffering peak-to-trough declines of 40-50% or more. 

This is true long-term investment, based not only on the belief that the region will recover economically, but also accomplish what we all hope for in the future: a lasting, peaceful coexistence among all Middle Eastern nations. For those looking for investments with global impact considerations, 2023’s disturbing events may just be the moment to lean in and research the possibilities of investing in the face of such turbulent times.