ETF Of The Week: Saudi Arabia ‘KSA’ Shines

What a difference three years makes. On Wednesday, MSCI announced that next year it plans to add two new countries to its emerging markets index: Argentina and Saudi Arabia.

Though Argentina is fascinating in its own right, most market observers are rightfully keeping their eyes on Saudi Arabia, whose economy has evolved rapidly since the country first opened its markets to foreign investment in the summer of 2015.

Since then, foreign mega-corporations like Dow Chemical and Lockheed Martin have brought tens of billions of dollars of business to the kingdom. Today the Saudi Arabia stock market boasts a market capitalization of roughly $520 billion, making the Tadawul, as it's known, the largest stock market in the Arab world.

Two-Part Phase-In

At the same time, Saudi Arabia’s Crown Prince Mohammed bin Salman has ushered in various social and cultural reforms designed to modernize the country, such as allowing women to drive and enter sports stadiums. (That's not to say all is rosy in the country: The crown has taken questionable actions, too, such as last winter's arrest of dozens of businessmen and bureaucrats last year on "anticorruption" charges.)

MSCI plans to introduce Saudi Arabia to its emerging markets index in two phases, and will give the country a starting weight of 2.6%. That's almost identical to the starting weight FTSE Russell plans to give Saudi Arabia (2.6%) when it adds the country to its emerging markets index next year.

Speculation over whether the indexers would add the country to their emerging markets benchmarks and in what amounts has helped boost the Tadawul over the past few months. In fact, last month ETF.com found that the iShares MSCI Saudi Arabia ETF (KSA) was the top-performing single-country fund of 2018 (read: "Best Performing Single Country ETFs").

That outperformance hasn't abated one bit: Year-to-date, KSA is up 17.5%, compared with SPY's 4.3%.

Source: StockCharts; data as of June 21, 2018

With $266 million in assets under management, KSA is large and popular for a single-country ETF, especially for a frontier market—well, now emerging market—fund. Year-to-date, KSA has soaked up $234 million in new net inflows. It trades with solid volume ($4 million daily) and relatively tight spreads (0.14%).

Though Saudi Arabia is known for its rich oil fields, the bulk of KSA's portfolio is not in energy (21%) but in financials (42%). That’s because the country’s oil assets are privately owned by the kingdom.

Expect that balance to shift somewhat, though, if and when the state-owned energy giant Saudi Arabian Oil (aka Aramco) finally holds its IPO. (Though the precise timing is still unknown, perhaps even to Saudi officials, the IPO is widely expected to happen sometime this year or next.)

The largest company in KSA's portfolio is Saudi Basic Industries, a basic materials firm that comprises 16% of the fund. No surprise there: SABIC is the largest public company listed in the Middle East.

KSA comes with an annual expense ratio of 0.74%, which is pricy for an emerging market fund, but par for the course for Middle East and Africa (MENA) ETFs.

Contact Lara Crigger at [email protected]