Although it is home to just two members of the Organization of Petroleum Exporting Countries (OPEC), the iShares MSCI Frontier 100 ETF (NYSEArca: FM) has not been immune to slumping oil prices.
Over the past 90 days, the United States Brent Oil Fund (NYSEArca: BNO) and the United States Oil Fund (NYSEArca: USO) are off an average of 30.3%, making the 9.2% decline for FM over the same period look good by comparison.
However, that 9.2% drop underscores FM’s sensitivity to oil prices despite the fact that the largest frontier markets ETF allocates just 14.7% of its weight to energy stocks. That is barely more than a third of the weight the ETF devotes to the financial services sector. [Broader Horizons With Frontier ETFs]
Although FM is not excessively allocated to the energy sector, some of its largest country weights are OPEC members that are dependent on oil for an excessive percentage of government revenue. OPEC member Kuwait proves that point. Kuwait depends on oil to generate over 75% of government receipts, according to Quartz.
Kuwait is FM’s largest country weight at 25.2%, nearly double the 13.2% the ETF allocates to Nigeria, another OPEC member. Although Nigeria was not featured on the Quartz list of oil-producing nations that are dependent on crude as a revenue driver, Africa’s largest economy counts on oil exports for roughly 70% of government receipts. Not surprisingly, the Global X MSCI Nigeria ETF (NYSEArca: NGE) is off 24% over the past 90 days. [Nigeria ETF Continues to Tumble]
A 9.2% 90-day decline for FM is nothing to brag about, but the ETF’s decline would likely be a tad worse if not for the United Arab Emirates being promoted to emerging markets status earlier this year. Once one of FM’s largest country weights, OPEC member UAE derives two-thirds of government revenue from oil. The iShares MSCI UAE Capped ETF (NasdaqGM: UAE) is off 7.2% over the past 90 days.
Surprisingly, the iShares MSCI Qatar Capped ETF (NasdaqGM: QAT) is up 1.2% over that period. Qatar, which joined UAE in making the leap to the emerging markets classification, counts on oil for over half of government revenue, according to Quartz.
The Market Vectors Gulf States Index ETF (NYSEArca: MES) is lower by 5.2% over the past three months. UAE, Qatar and Kuwait combine for nearly 83% of MES’ weight, though that ETF’s energy sector exposure is slight at 5.1%.
MES also has some Saudi Arabia exposure, which is notable in the current environment, because only Iraq depends more heavily on oil for government revenue than Saudi Arabia. MES has long provided Saudi exposure because the Market Vectors GDP GCC Index (MVMESTR), the ETF’s underlying index, allows for the inclusion of companies that derive over 50% of their sales from a target country. Still, MES’ Saudi exposure is small at less than 5% of the fund’s weight. [Saudi Arabia Could Affect Some ETFs]
