Even as more familiar developing world equity markets rebound, frontier markets are on the receiving end of increased attention by global investors.
That much is cemented by the 7% gained by the iShares MSCI Frontier 100 ETF (NYSEArca: FM) over the past month, a run that extends a lengthy period of out-performance by FM over the iShares MSCI Emerging Markets ETF (NYSEArca: EEM). EEM is up 5% in the past month.
Imminent changes will materially alter FM and its underlying index, the MSCI Frontier Markets 100 Index. Next month, Qatar and the United Arab Emirates depart frontier status to join the MSCI Emerging Markets Index and that promotion is helping lift stocks in both Arab nations. [Pakistan Becomes a Bigger Part of Frontier ETF]
“HSBC have projected MSCI-related passive inflows into the UAE and Qatar at about $500 million for each country,” according to Arabian Business. However, those numbers surge when accounting for actively managed funds that must scoop up more stocks in Qatar and UAE.
“VTB Capital estimates Qatar may attract as much as $2.6 billion of such money as a result of the MSCI upgrade, with the UAE drawing up to $2.3 billion,” according to Arabian Business. Foreign investors boosted their exposure to Dubai-listed shares by 39% since the end of last year.
Even more so than FM, an ETF that has undoubtedly rewarded investors for over a year, some other ETFs are benefiting from the influx of foreign money to Qatar and UAE. Best of all, these ETFs are not dedicated frontier markets funds, meaning they will not lose exposure to Qatar and UAE when the two make the jump to frontier status.
The WisdomTree Middle East Dividend Fund (NasdaqGM: GULF) and the Market Vectors Gulf States Index ETF (NYSEArca: MES) have combined weights to Qatar and UAE of 58.5% and 64%, respectively. [The Allure of Frontier Markets ETFs]
As important as knowing that money is flowing into these markets is knowing what stocks investors are buying. Those include blue chips such as Emaar Properties and Qatar National Bank along with other Qatari banks. Financials account for over 59% of GULF’s weight and Qatar National Bank is the ETF’s second-largest holding at a weight of 7.1%.
GULF also features a tempting distribution yield of 6.5%, partially the result of solid dividend growth from Dubai and Qatar-listed financial services and telecom shares dating back to last year. [A Surprise Region Leads ETFs in 2014]
MES allocates almost 63% of its weight to financials. Emaar Properties and Qatar National Bank combine for 12.3% of that ETF’s weight.
Although GULF and MES do not yet qualify as large ETFs, money flowing into Qatar and UAE has been reflected in these ETFs. GULF has nearly doubled in size this year while MES gained more than 20% of its current assets since the start of 2014.
WisdomTree Middle East Dividend Fund
Tom Lydon’s clients own shares of EEM.