As investors become more willing to add risk to their portfolios and reap the greater benefits that may come with such risk, emerging markets become more appealing.

One of the most interesting emerging areas of the world might be the “Islamic Triangle,” which can be easily accessed with exchange traded funds (ETFs). However, recent events have highlighted the risks that can accompany venturing into the region right now.

The Middle East Unrest

The recent wave of unrest in the Middle East stems from economic problems, such as high unemployment, growing population of youths, a wide discrepancy between the rich and poor and autocratic regimes that enrich a small few at the expense of the majority.

Although in some areas, uprisings have died down, in others, they’re still going strong. Protesters in Libya are doing daily battle with Qaddafi’s forces, while similar events are taking place in Yemen and throughout the Middle East.

The effect has dragged some Middle East ETFs, but it has offered a lesson for investors: not all Middle East ETFs have been hit in the same way. If you want to venture to this region, look under the hood to see where they’re exposed.

  • Market Vectors Egypt ETF (NYSEArca: EGPT) down 12.8% in the last month.

While the social climate is starting to stabilize, the economy remains uncertain. Egypt’s stock market only recently reopened, and a new leader for the country is not in place yet. There could be shocks coming.

  • WisdomTree Middle East Dividend Fund (NYSEArca: GULF) down 8.3% in the last month

Top country holdings include: Qatar 28%, Kuwait 24% and the UAE 22%, which have not experienced the uprisings of other countries in the region, with smaller weightings going to Morocco, Egypt, Oman and Jordan.

  • Market Vectors Gulf States Index ETF (NYSEArca: MES) down 14.9% in the last month

Like GULF, MES leans more toward relatively stable Gulf States, like Kuwait 44%, Qatar 25% and the UAE 20%, with smaller allocations to markets such as Bahrain and Yemen. Like many other funds, MES is heavily weighted in the financial sector – banks and financial services companies are more than 55% of assets.

  • PowerShares MENA Frontier Countries (NYSEArca: PMNA) down 8.5% in the last month

PMNA also counts the United Arab Emirates and Kuwait as the top countries, while Morocco and Egypt make up significant amounts, as well.

  • iShares MSCI Israel Investable Market Index Fund (NYSEArca: EIS) down 4.2% in the last month

While Israel’s political environment isn’t in danger of toppling, the country has found itself at odds with its neighbors in recent weeks. The new Egyptian government recently authorized two warships to pass through the Suez Canal, which will look aggressive to Israel. With the transition to a new Egyptian government, the future relations between Egypt and Israel are also put into question.

  • SPDR S&P Emerging Middle East & Africa ETF (NYSEArca: GAF) up 2.5% in the last month

While the fund does hold an “emerging middle east” moniker, GAF holds about 88% of its assets to South African stocks and splits the rest between Egypt and Morocco, which makes it rather insulated from the events in the Middle East.

The Middle East

The Middle East is a large area of the world. North Africa can sometimes be lumped in with the region, which together form the MENA acronym. Countries in the Middle East, around half of the 20 in the Islamic Triangle area, have tied their currencies to the U.S. dollar, and the low interest rate environment in the U.S. reflates these countries faster as a result of little or no structural problems.

Before the financial crisis, countries in the region enjoyed healthy gains, primarily backed by rising oil prices and the liberalization of the markets. Higher commodity prices, more notably oil, will also help support investor sentiment for the area.

Unfortunately, that’s also a downside risk of the Middle East: its fortunes depend in large part on the availability and price of oil.

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