Frontier Middle East Markets ETF?

By Travis Johnson, Stock Gumshoe, September 2, 2008

There has been a flurry of ads from the several newsletters that specialize in ETF selection (ETFs are exchange traded funds, for those who might not know — they’re more or less like regular mutual funds, but are listed on a major exchange and traded throughout the day, and usually track an index), and many of those ads are focusing on one of the hottest markets in the world: The Middle East.

There are a couple of reasons for that:

1, the stock markets and companies of the Middle East and North Africa really are on fire, and have been for a couple years in most cases — this is thanks in part to high oil prices, of course.

2, the ETFs and mutual funds that focus on this part of the world are all very, very new, so they think you won’t have heard of them yet … which means they can tempt you with the promise of the name and hope that you really will believe that the ETF will remain mysteriously hidden from your view without their help.

Thanks to your friendly neighborhood Stock Gumshoe, and to the mighty powers of his Thinkolator, you needn’t worry about number 2.

Now, let me be clear before I let the cat out of the bag on this one — there are a lot of newsletters that focus on ETFs and on regular mutual funds, and they might indeed be helpful for some folks. It remains true that most people, professionals included, are pretty bad at picking stocks, particularly in the short run, and that some form of indexing will probably outperform the average or novice investor most of the time, and will outperform even the best professionals some of the time.

The mutual fund-picking newsletters generally practice market timing and sector timing techniques of one sort or another, trying to outperform the broad indexes by getting you in and out of the best sectors, countries, or divisions of the market. That’s not necessarily that much easier than picking stocks for the long haul, it all depends on what you need, want, or like … but my point, tortured though it is now, is that several of these newsletters are good, and the fact that they choose from a much smaller universe doesn’t mean that they’re inherently stupid. (Actually, depending on how you look at it, some of them have larger universes to consider if they go beyond ETFs — there are more mutual funds in the US than there are publicly listed stocks on the major exchanges, but the vast majority of those are high-cost, broker-sold, restricted to particular investors, or too terrible to begin to consider using them.)

Indeed, a few of these newsletters are among the best performing long term performers in the Hulbert rankings. That’s largely because they don’t pick stocks, so none of their picks are likely to fall by 50% in any given year (though that does occasionally happen with some narrow ETFs and funds) and they tend to have less volatile performance due to the forced diversification of an ETF or fund portfolio. Don’t get me wrong, there are plenty of these newsletters that underperform the market, too, they’re just not inherently worse than stock picking newsletters.

But I did have a specific ETF to look for here, and it was teased by the folks at Street Authority, yet another reasonably large financial newsletter publisher that’s just down the road from my home. OK, it’s a long road, but I could walk there without ever being more than a mile from a Starbucks. The newsletter is called the ETF Authority, and it’s edited by Nathan Slaughter, who signed the ad I received in my inbox today. It’ll cost you $397, a special “discount” from the normal price of twice that much (that might be a bit tough to take for a mutual fund newsletter for some folks, Hulbert doesn’t track many ETF pickers but the best performing mutual fund newsletters, like No Load Fund X or the Vanguard or Fidelity-specific advisers, are often significantly less expensive than that and few approach the $800 “normal” price).

What does the ad tell us, aside from the fact that it’s an ETF that focuses on the Middle East and North Africa?

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They include this little snapshot of the fund:

PE Ratio: 12.8

Expense Ratio: .88%

Strategy: tracks a dividend-weighted index 100 stocks trading in Kuwait, Egypt, Qatar and several other Middle East markets.

´╗┐Top Five Holdings: Maroc Telecom (9.7%), Emirates NBD (4.2%), National Bank of Kuwait (3.8%), Mobile Telecom (3.4%), Arab Bank (3.0%).

So, all of that sounds somewhat interesting, and is enough to narrow it down to our specific ETF … but do they say anything else that might pique our little greed impulses?

There’s a lovely bar graph showing the annual returns of stocks in several of these countries — over 75% for both Bahrain and Oman, for example, so that tends to get one’s juices flowing.

They mention Dubai, in order to remind us that it’s not just about oil, that some of these countries are using that oil wealth to try to build vibrant, sustainable economies, along the way building ridiculous and attention-getting projects like the Burj Dubai (tallest building in the world for at least 15 minutes, under construction) or the Palm or Earth concrete island developments.

And here’s the last big of salesmanship for us:

“In short, countries throughout the Middle East are using a flood of oil revenues to diversify their economies, upgrade their infrastructure, enrich the lives of their citizens, increase per-capita income, and attract outside foreign investment capital — all of which bodes well for companies operating in the region….

“Like any asset class, the Middle East markets have their own unique risks to consider, and I wouldn’t be doing you any favors by skating over them. In this part of the world, armed conflicts and political turmoil are ever-present threats. Plus, these markets are still a step behind when it comes to regulatory oversight and accounting standards — the SEC isn’t there to look over anyone’s shoulder. Nevertheless, this is a classic case of the risks being far outweighed by the potential rewards.

“Thanks to the recent launch of several new ETFs, U.S. investors have access to some of these markets for the first time. And although these are relatively funds, many of them track well-established market indices.

“With all this in mind, those interested in the frontier markets of the Middle East and beyond might want to begin with one of my top picks…

“This ETF Targets Strong Income Producers

“Reasons to Buy:

“Oil-rich nations of the Middle East are enjoying robust and diverse economic expansion. Stocks in this oasis should continue to surge.

“This ETF’s focus on established, dividend-paying companies should lend some security to this still precarious, but potentially lucrative region — and backtested data shows superior annual gains of +26.7% over the past three years.

“As I suspected last month, this ETF looks to be the “best of breed” among the frontier markets group thus far.”

So … any guesses out there in the audience? No?

It’s true that there are several new ETFs that specialize in the Middle East and North Africa … but this specific one is …

WisdomTree Middle East Dividend Fund (GULF)

This fund has been around for almost two months, which puts it in the same daycare class as its two major competitors, the PowerShares MENA ETF (PMNA) and the Market Vectors Gulf States Index (MES). All three are a little bit different — PMNA is the broader index, pulling in Egypt and a few other countries outside the Gulf States, the Gulf States Index ETF is much smaller and narrower in focus, and our pick for today, the Middle East Dividend Fund, is the odd bird of indexes.

Wisdom Tree has gotten a lot of attention over the past year for doing things a bit differently — the typical index ETF, like any old S&P 500 Index fund, uses company market cap to apportion money to each stock in the index. That means all Index funds are market-cap weighted, so that the biggest holdings in any S&P Index fund will be companies like Exxon Mobil, Microsoft, etc, in order of their size. Wisdom Tree uses fundamental metrics like dividends and earnings to weight their indexes, so the largest holdings will be those that they think are cheaper, or pay higher dividends, or match other metrics they’re searching for. The firm wisely brought on Jeremy Siegel as their strategy advisor, who aside from being a professor at Wharton is a Wall Street God, having written Stocks for the Long Run and made probably the most compelling case yet for dividends as a critical factor in investing success. You’ve probably seen him in their ads if you spend any time watching CNBC.

It is a compelling argument, and it has been back tested for impressive gains, but these funds are all quite new, so I have no idea how the strategy will do over the next decades, especially for areas like emerging and frontier markets, where it’s reasonable to ask whether the same old rules will apply.

So … there is a bundle of logic behind this, and, thanks to the strategy, there is a good yield — just like any other fund, this one will pass along the dividends to you, and the yield for the index is 5.78% (we don’t know yet exactly what the yield will be on the ETF, but that’s a good starting point for guessing). The fund avoids some of the bigger markets, like Israel, and the dividend focus means that you are more exposed to countries like Kuwait than you are to the larger Egyptian market, for example. Their “universe” is companies that are incorporated and listed in Bahrain, Egypt, Jordan, Kuwait, Morocco, Oman, Qatar or the United Arab Emirates.

And thanks to the booming markets in this neck of the woods, and their focus on oil and regional development, the markets as a whole have a very low correlation to the US markets, so these kinds of ETFs are probably decent tools for diversifying if you wish to pick up some exposure to relatively risky “frontier” markets. The broad indexes of emerging markets, which focus on the biggies like Brazil, China, etc., have fairly high correlations to the US market, but many frontier markets have much lower correlation — I think the correlation for this ETF is around .25, which is quite low.

What else stands out about this one? Well, because it’s dividend-weighted it has a tendency to focus on a few industries — financials, real estate/development, and telecom are likely ones to be high-dividend stocks in many markets, and it’s no different here, with a real focus on the financial sector. If you add up banks, diversified financials, and insurance, the total weight of that broad sector is just a hair under 50% for this fund.

Much of the actual oil is owned and produced by the governments in these countries, so although I assume their economies will fluctuate with oil, you don’t necessarily get much direct exposure to oil drillers or service companies through these ETFs. Lots of banks, though — I wouldn’t guess that many of them have direct ties to the current credit crisis inflicting the big US, European and international banks, but it’s always possible, and many of these companies, while fairly large, are pretty opaque to US investors.

Which is a long-winded way of saying I’d probably be more comfortable buying this ETF than I would buying shares of Arab Bank, for example, but it’s worth noting that there’s a big dollop of financial companies in this index, and possibly also a fairly close correlation to the price of oil over extended periods of time. There’s also a big exposure to the big financial center countries, like Kuwait and the UAE, relative to some others (and you don’t get any Saudi Arabia, for example, because that market is essentially closed to foreigners).

If you want to look at something a little broader and more stable, there’s always the geographically larger Middle East and Africa index, which you can find represented by several ETFs, including the SPDR S&P Emerging Middle East & Africa ETF (GAF). The problem some folks have with those is that there are two really big, mature economies in that region and their stocks tend to dominate the ETF, so you end up being mostly exposed to South Africa and Israel, neither of which is growing at anything like the rate of some of Gulf states or emerging African nations.

Over the last three years, which is all they apparently looked at for their backtest, this dividend-weighted index was a much better performer than the broader MSCI Arabian Markets (ex. Saudi Arabia) index.

So … if you want to get some “frontier” market exposure, this is one idea for an area of the world where frontier markets are thick on the ground and growth has been very, very impressive in the last couple years. I don’t know whether it will make you rich or whether that decent dividend yield will persist in the years ahead, I just know that Nathan Slaughter at ETF Authority thinks it’s a good pick and that I’m not very good at keeping secrets — and for that, you owe me … nothin’. (Though you can certainly become a paying Gumshoe Irregular if that will warm your heart — I know it will warm mine!)

Here are the links for the basic information for this ETF and each of its major competitors — they’re all very new, so make sure to look at the index information they give, not just at the actual fund performance:
WisdomTree Middle East Dividend Fund (GULF)

Gulf States Index ETF (MES)

Invesco PowerShares MENA Frontier Countries Portfolio (PMNA)

And for the broader one that includes South Africa and Israel:
SPDR S&P Emerging Middle East & Africa ETF (GAF)

Hope you’re all happy and healthy — and a hearty “welcome back to school” to all the tykes out there in Gumshoedom.



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September 2, 2008 2:27 pm

Superb job, as usual, O Great Gumshoe. What I love in particular is the way you show alternatives to the teased ETF. Actually, there’s one more, though it’s a fund, and funds are just so yesterday. But T. Rowe Price’s TRAMX offers much the same exposure as GAF, and I rather like T. Rowe’s record on emerging markets. There is also the benefit of being able to start a position with small amount of money and then use dollar-cost averaging to build and take advantage of the inevitable volatility. (Please don’t anyone take this as a recommendation, it’s just info.)

I also have some observations on the Gulf states, having spent quite a bit of time there. I’ve actually met and interviewed Sheikh Mohammed bin Rashid al Maktoum, ruler of Dubai, after writing a poem about one of his racing camels. I found him to be one of the shrewdest people on the planet. (That a long story, and I digress.) I made my first trip to Dubai when the only high rise was a very lonely World Trade Center out in the middle of Nowhere.

That Nowhere has since become something out of a futuristic Ali Baba spectacle. Dubai has always been a formidable entrepot, with something for everyone, and now it has much, much more of those somethings for the very rich everyones. But I have to confess a certain unease with this empire built on sand. I wonder if it’s sustainable. There’s something about it that reminds me of the hanging gardens of Babylon, or Shelley’s famous poem Ozymandias, with the shattered colossus lying in ruins in the sand.

It may well be eons before some lone traveler comes upon the ruins of the Burj Hotel and wonders what the heck they were thinking of to build something like that. But the oil will indeed run out, and the water will run out sooner. And the have-nots whose labor has built these amazing towers may also run out of patience.

Just something to think about, which has nothing to do with numbers, but with historical cycles.

Gumshoe, I promise not to wax poetic more than once a year.

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September 3, 2008 1:06 am

(GULF), and (PMNA) I like alot.
So-so on the market vectors; But not at all interested in anything doing with South Africa.
Too much tribalism;Too many Robert Mugabe’s in the wings.Lots of Chinese influence growing…Patrice
Lamumba; The ANC, and Dragone Rouge, pretty much cured me of any further interest in Africa.
Africa is likely the one place on earth that would be better for the return of colonialism.

A couple of flies in the buttermilk with (PMNA)
and (GULF), are the Sovereign funds were perhaps invested much too early in our financial markets (Though the various Emerates weren’t the only ones to jump the gun…);Additionally, Dubai is apparently in a real estate crisis…Too much, too expensive; Too fast.
Liquidity is shifting East, so the Middle East is
a desirable place, and these ETF’s, are the way to take part…I’m in a couple of them, and feel I was maybe a little too early…I don’t believe in a global disconnect…Our financial problems are going to affect global economics to some extent for some time to come.
By the way…A number of currency ETF’s, or ETN’s, are out. Especially the Chinese Yuan….They
trade on the London Exchange…Though there may be an OTC symbol (pink sheets). It takes about 40 days for an otc symbol…But maybe. Jim Rogers feels the Yuan is the place to be as far as a currency goes, for several years.

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September 3, 2008 11:43 am

Here’s some data to back up my unease about the Gulf region. It’s an excerpt from a Bloomberg report:

“The fastest-growing part of the global bond market is faltering, and it has nothing to do with subprime mortgages or the credit crunch.

Sales of Shariah-compliant debt, which financed Dubai’s Palm development, the world’s largest man-made island and where David Beckham and Donald Trump have homes, fell 50 percent in 2008 and prices dropped an average 1.51 percent, according to HSBC Holdings Plc index data.

The so-called sukuk market, which has doubled each year since 2004 and grown to $90 billion, is declining after a Bahrain-based group of Islamic scholars decreed in February that most bonds ran afoul of religious rules. Only one that complies with the edict has been issued, pushing up borrowing costs on projects including $200 billion of real-estate developments in the United Arab Emirates capital.

“In times of distress, the first thing investors sell are the credits they don’t fully understand,” said James Milligan, Dubai-based head of Middle East fixed-income trading at HSBC, the biggest underwriter of sukuk bonds in the Gulf last year. “This has hit spreads hard in the region,” he said, referring to the relative level of the Islamic bonds’ yields.

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September 3, 2008 1:21 pm

Nice adendum, WWP. It jibes. With apologies to Bloombergs report; Sub-primes, and
credit crunches triggered the faultering of the
global bond market, as global banks like
Deutchesbank, invested in our sub-primes…That brought into question the real problem unfolding (I think).
trillions of CDO’s circling the planet like volcanic ash. No one knows just how much is out there. I’ve read every amount speculated, from $15 trillion, to $145 trillion…I am not smart enough
to know who ,if anyone, is right. What bothers me, is that we have too many ignorant “experts”
calling the shots. When I look smart compared to them…Well….

September 3, 2008 7:03 pm

HEY, Gumshoe~! Loved the comments above, and your replies, etc etc,,,
Since I am a stay at home type of guy, I travel vicariously, through the eyes and hearts of others,,, SO, cannot comment directly on what’s going on, or not,,,
The point of THIS comment, is to tell you I am VERY impressed, with the email I received on this date~! AND what you have done to enhance the notice~!,,, You can edit mine, to remove the “Unsubscribe”,,, I will never use it, and it just wastes bytes,,,
Kudos on your hard work, Travis,,, You did a fine job,,, and if it is erratic for a while, so what??? Rome and New York weren’t built in a day~! I’ll give you till tomorrow, to get things straightened out,,,
Blessings to All, onboard~!

September 4, 2008 2:31 am

Here’s the URL of the Bloomberg article on Sukuk:

The article pertains to bonds, not stocks.

That said, the stocks seem to be affected, too, since TRAMX is down -15.05% year-to-date whereas not long ago it was actually in the black.

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elissa S.
elissa S.
September 4, 2008 11:47 am

For free information on ETF’s, check out Gary Gordon’s blog on Seeking Alpha. It is called ETF EXPERT, and I have found some of his comments very insightful.

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October 28, 2008 1:58 am

Hi, Do something for help the hungry people from Africa and India,
I created this blog about them:

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Rose Anderson
Rose Anderson
September 21, 2010 2:47 am

As I see in your post there is good information available on Islamic finance and investment market .Sukuk is an alternate way of investment where the investor get the benefits of investment and its treated as rent on investment, to avoid the interest on investment which is strictly prohibited in Islam.I have also some site and blog ,I have write on same topic check my post :….

I want to write on guest post for your blog based on change on the Islamic debt market.If you agree than contact me at