Saudi Arabia ETF On Front Line Of Change

Saudi Arabia is looking to diversify the country’s sources of income away from the oil market amid lingering oil price weakness globally, and rising interest rates domestically. The move could eventually impact the exposure investors have to the country’s economy in an ETF wrapper in two ways.

The iShares MSCI Saudi Arabia Capped (KSA)—the only pure-play Saudi ETF today—tracks a market-cap-weighted index of Saudi Arabian firms covering 99% of the market-cap spectrum.

Investing Over Oil

Bloomberg reported this week that Saudi Prince Mohammed bin Salman’s plan to broaden the Saudi economy includes the creation of a sovereign wealth fund that would eventually hold more than $2 trillion in assets.

“The tectonic moves ‘will technically make investments the source of Saudi government revenue, not oil,’ the prince says,” Bloomberg reported.

This shift away from oil and into investments—in a country that has seen about 90% of its state budget and more than half of its GDP covered by petroleum assets—could impact all sorts of industries that KSA taps into.

About 32% of the fund invests in financials, and 30% is tied to the materials sector. Some 12% is in telecommunications, according to iShares data.

Scant Energy Exposure

But what’s also noteworthy is that while KSA’s coverage is wide—99% of market cap—the fund lacks exposure to the country’s best-known sector: energy. Only 1.4% of KSA’s portfolio is linked to energy, because in Saudi Arabia, oil companies are state-owned and state-run.

Part of the prince’s plan to diversify sources of income includes a stake sale in oil giant Saudi Aramco, potentially opening up the path for access by U.S. investors down the road.

KSA, which came to market last September, spiked higher following the prince’s decision. The small fund has been inching higher in recent weeks, as the chart below shows:

Chart courtesy of StockCharts.com

Saudi Arabia first opened its stock market to foreign investors last summer, allowing for the first time for large index providers such as MSCI to add the Middle East country to equity indexes. The market is one of the 10 biggest emerging markets today, similar in size to Mexico.

Contact Cinthia Murphy at [email protected].