Imagine the allure of equity markets that are soaring while providing investors with global exposure and strong dividend yields without the often irksome correlations to developed and emerging markets stocks.
That combination may sound hard to obtain. Actually, it is not. That much has been proven since the start of 2013 as select Middle East markets, namely Qatar and the United Arab Emirates, have surged, lifting exchange traded funds such as the WisdomTree Middle East Dividend Fund (NasdaqGS: GULF) along the way. [Diversify With Middle East ETFs]
Due to the region’s reputation for geopolitical volatility and liquidity concerns, the Middle East usually is not the first region investors think of when hunting for international exposure. GULF’s 46.5% gain since the start of 2013 indicates the region and the ETF merit deeper consideration.
While acknowledging there are some liquidity concerns the further investors go into less developed equity markets, WisdomTree Chief Investment Strategist Luciano Siracusano III says GULF “tries to ameliorate that by screening for investable large-cap stocks.”
“GULF’s top five holdings typically trade 150,000 to 1.8 million shares per day,” said Siracusano in an interview with ETF Trends. “We wanted to ensure enough liquidity to make the fund investable and that’s one reason we limited the index to the 100 largest dividend payers.”
GULF tracks the WisdomTree Middle East Dividend Index (WTEMME), which is not only dividend-weighted, but includes only companies that can be purchased by foreign investors. The index is home to 74 companies as of Feb. 10, though GULF currently holds 70 stocks. Over 88% of the WisdomTree Middle East Dividend Index’s holdings are either large- or mid-caps and the index has a total market value of $370 billion, according to WisdomTree data.
At the country level, Qatar and UAE combine for 58% of GULF’s weight. Along with Kuwait (another 15.1% of the ETF’s weight), those markets stand as some of the most advanced and liquid in a region view as illiquid and rough and tumble. As Siracusano notes, part of the allure of Qatar and UAE is that those markets were promoted to emerging status from frontier classification last year by index provider MSCI. The two will join the MSCI Emerging markets in the second quarter. [Middle East Sparks Frontier Market ETFs]
“The emerging markets promotion is one of the catalysts driving volumes and share price appreciation. GULF’s underlying index is up about 23% since MSCI made the announcement,” said Siracusano.
While the looming loss of Qatar and UAE is expected to have some impact on funds that benchmark to MSCI frontier markets indices, Siracusano confirmed WisdomTree has not made any announcements regarding changes to GULF’s underlying index. With Qatar and UAE expected to initially account for scant percentages of the MSCI Emerging Markets Index, GULF’s status as one of the best ETF avenues to more advanced Middle East markets is cemented. [A Surprising Region Leading Global ETFs in 2014]
There is, however, more to GULF’s story than just a market classification promotion for Qatar and UAE.
“It’s not unusual for hedge funds and other tactical traders to buy country exposure in advance of index changes, but there are other things going on in these countries to attract interest,” said Siracusano. “Dubai is an emerging financial hub. After being ignored for a long time, the Gulf states are just beginning to get back on peoples’ radars.”
There are valid reasons why that is the case. The dividend yield on GULF’s index is almost 5.2% and for that privilege, investors will find comparable valuations to what they would find in discounted emerging markets. Then there are the low correlations. Since inception, the WisdomTree Middle East Dividend Index has an average correlation of 0.764 to the MSCI Emerging Markets Index and the S&P 500, according to WisdomTree data. The index’s beta against the MSCI Emerging Markets Index is just 0.54.
Investors are taking notice. GULF is up 9.5% year-to-date and its shares outstanding count has doubled in the past year.
WisdomTree Middle East Dividend Fund
