The iShares MSCI Saudi Arabia ETF (NYSEArca: KSA) rose 0.75 percent on Wednesday and with good reason–index provider MSCI plans to add more Saudi Arabia stocks to its indexes–namely the MSCI Emerging Markets Index and MSCI All Country World Index.
This will help diversify the emerging markets index, which currently has a large tilt towards China and South Korea. After the inclusion of Saudi Arabia stocks, the total allocation towards the country will be at 2.6 percent.
MSCI plans to roll out the inclusion in two steps–one in May and the next one in August.
“Saudi Arabia’s inclusion in the emerging markets (EM) index may provide expansion of the investment opportunity set, and the country has previously demonstrated diversification benefits,” said MSCI. “These include the market’s past dividend yield, its distinct sector composition, low sensitivity to other emerging markets and its previous natural currency hedge.”
As for KSA, it has been seeing a nice run up this far in 2019–up 15.26 percent year-to-date. Even during a challenging 2018 for emerging markets as a whole, KSA gained 13.07 percent.
While the majority of investors might have been driven away by the red prices in emerging markets during much of 2018, savvy investors who were quick to see the opportunity viewed EM as a substantial markdown. From a fundamental standpoint, low price-to-earnings ratios in emerging markets ETFs have made them prime value plays as capital inflows continue in 2019.
Saudi Arabia, however, may have been overlooked by investors via KSA. The fund seeks to track the investment results of the MSCI Saudi Arabia IMI 25/50 Index, which is a free float-adjusted market capitalization-weighted index with a capping methodology applied to issuer weights so that no single issuer of a component exceeds 25 percent of the index weight, and all issuers with a weight above 5% do not cumulatively exceed 50% of the index weight.
Looking at its chart, KSA has managed to outperform a more broad-based EM ETF in the iShares MSCI Emerging Markets ETF (NYSEArca: EEM):
According to Morningstar performance numbers, EEM is up about 10 percent, which speaks to the bounce-back emerging markets are having in totality thus far this year. Ongoing U.S.-China trade negotiations and geopolitical tensions put emerging markets in a state of unease in 2018, but investors can now look to their resurgence.
“From a P/E ratio standpoint, some ETFs have P/Es that are close to single digits, which is crazy–almost 50 percent of what you’re getting in the US,” said ETF Trends CEO Tom Lydon on Yahoo! Finance Live. “If you don’t have allocation overseas, now’s the time to think about it because emerging markets have underperformed the last five years.”
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