GULF: Treasure Discovered In The Middle East

Feb.25.13 | About: WisdomTree Middle (GULF)

The other morning, my five-year old son asked if I had heard of a treasure called the "magical desert moonstone." I had not of course, but was curious and asked about this mystical object. "Dad," he replied, breaking into a wide grin, "the desert moonstone is special because it makes you lucky!"

While not my son's moonstone, I call to your attention to another "desert treasure" in the form of an undervalued ETF with increasing momentum and good risk-adjusted returns uncorrelated with the broad markets. This off-the-beaten BRIC road fund is the WisdomTree Middle East Dividend Fund (NASDAQ:GULF). While narrowly focused and small in AUM, it trades enough for individuals and advisers to accumulate parcels over time. If you are willing to stomach some political gamesmanship, this could be a multi-bagger over time with the right catalyst.

GULF tracks a fundamentally weighted index of 52 companies in the region, concentrated in domestic financials, telecom, and industrials opposed to energy/oil. The largest three countries represented are United Arab Emirates (NASDAQ:UAE), Qatar, and Kuwait, which recently scored #8, #10, and #13, respectively, in the Top 25 Frontier Markets rankings from the March 2013 issue of Bloomberg Markets.

Consider GULF's set-up for an asymmetrical payoff: stock prices in this region are starting from a low base, global equities have more running room due to flows away from bonds and cash, and banks and domestic industries in these countries remain awash in petrodollars (in surprisingly stable currencies) despite the boom in U.S. unconventional energy, all which should provide protection against and benefit from expected inflation in the next 1-3 years.

Additional reasons to like GULF:

  • Global investment capital helps to further democratize in the region. When was the last time an American made money from legitimate business activities in the Middle East without a military invasion or backroom deal?
  • WisdomTree Investments, Inc. (NASDAQ:WETF) is a well-respected sponsor. This publicly-traded manager was one of the first to develop ETF indexes on a fundamental basis (earnings and dividends), offers unique product sleeves, and has grown assets to around $23B. It's hit a homerun with the WisdomTree Japan Hedged Equity Fund (NYSEARCA:DXJ), in part a lucky coincidence, but also because they had the right product to catch this macro trend. Will they do the same with GULF?
  • GULF has a 3-year Month-End Beta to the S&P 500 of .48, a 1-year Sharpe Ratio of 1.15, and a 3-year Sharpe Ratio of .72. It has an Annualized 3-year Return of 7.80% with a 4.34% 30-day SEC Yield (see tables below). This is better than a high-yield bond, with no duration risk.

Exposures (as of 02/22/2013)

Country Allocation

1. United Arab Emirates

32.65%

2. Qatar

28.68%

3. Kuwait

17.84%

4. Morocco

8.32%

5. Egypt

7.92%

6. Oman

3.15%

7. Jordan

1.31%

Click to enlarge

Top Sectors

1. Financials

47.86%

2. Telecommunication Srvcs.

31.11%

3. Industrials

16.42%

4. Energy

2.42%

5. Materials

2.06%

Click to enlarge

Top Holdings

1. Mobile Telecom Co K

10.66%

2. Industries Qatar

9.66%

3. Maroc Telecom

8.29%

4. First Gulf Bank PJSC

5.67%

5. National Bank of Abu Dhabi

4.69%

6. Qatar Telecom Q-Tel QSC

4.17%

7. Telecom Egypt

4.15%

8. Qatar National Bank SAQ

4.14%

9. Abu Dhabi Commercial Bank

3.89%

10. Emirates NBD PJSC

3.80%

Click to enlarge

Included below are the 5-year, 1-year and 6-month charts for GULF against the Vanguard FTSE Emerging Markets ETF (NYSEARCA:VWO), iPath S&P GSCI Crude Oil Total Return Index ETN (NYSEARCA:OIL), and the Qatari and Kuwaiti currencies. Below you will see GULF shift from being crushed in 2008-09 to substantially healing over the past 6-12 months.

5-Year Return Chart

Click to enlarge
(Click to enlarge)

Source: Yahoo Finance

1-Year Return Chart

Click to enlarge
(Click to enlarge)

Source: Yahoo Finance

6-Month Return Chart

Click to enlarge
(Click to enlarge)

Source: Yahoo Finance

Equally important are GULF's fundamental ratios, risk profile, and performance against other commodity and emerging market WisdomTree ETFs, along with Vanguard's broad VWO. Let this be a map to discover this treasure.

Fundamental Ratios (Look Good)

Name

WISDOMTREE COMMODITY COUNTRY EQUITY FUND

(NYSEARCA:CCXE)

WISDOMTREE MIDDLE EAST DIVIDEND FUND

WISDOMTREE EMERGING MARKETS EQUITY INCOME FUND

(NYSEARCA:DEM)

WISDOMTREE EMERGING MARKETS SMALLCAP DIVIDEND FUND

(NYSEARCA:DGS)

VANGUARD FTSE EMERGING MARKETS ETF

Equity: Price/Trailing Earnings

10.14

01/31/2013

10.83

01/31/2013

8.45

01/31/2013

12.23

01/31/2013

10.00

12/31/2012

Equity: Price/Book

1.80

01/31/2013

1.47

01/31/2013

1.52

01/31/2013

1.34

01/31/2013

1.57

12/31/2012

Equity: Price/Sales

1.26

01/31/2013

2.26

01/31/2013

1.06

01/31/2013

0.87

01/31/2013

1.23

12/31/2012

Equity: Price/Cash Flow

5.84

01/31/2013

7.70

01/31/2013

5.19

01/31/2013

7.32

01/31/2013

7.28

12/31/2012

Equity: Historical Earnings Growth %

+12.36%

01/31/2013

+2.38%

01/31/2013

+19.33%

01/31/2013

+21.04%

01/31/2013

+18.64%

12/31/2012

Equity: Sales Growth %

-6.11%

01/31/2013

+1.02%

01/31/2013

-6.61%

01/31/2013

-14.07%

01/31/2013

-4.79%

12/31/2012

Equity: Cash Flow Growth %

+0.64%

01/31/2013

-15.13%

01/31/2013

-0.12%

01/31/2013

-22.38%

01/31/2013

+4.35%

12/31/2012

Equity: Book-Value Growth %

-47.15%

01/31/2013

+3.86%

01/31/2013

-47.48%

01/31/2013

-28.96%

01/31/2013

-31.61%

12/31/2012

Click to enlarge

Source: Fidelity.com

3-Year Relative Returns, Betas and Sharpe Ratios (Better)

FUND

WISDOMTREE COMMODITY COUNTRY EQUITY FUND

WISDOMTREE MIDDLE EAST DIVIDEND FUND

WISDOMTREE EMERGING MARKETS EQUITY INCOME FUND

WISDOMTREE EMERGING MARKETS SMALLCAP DIVIDEND FUND

VANGUARD FTSE EMERGING MARKETS ETF

Market Total Return (1 Yr)

+7.52%

02/23/2013

+11.71%

02/23/2013

-0.57%

02/23/2013

+8.77%

02/23/2013

+0.99%

02/23/2013

Market Total Return (3 Yr)

+10.05%

02/23/2013

+7.80%

02/23/2013

+8.23%

02/23/2013

+10.20%

02/23/2013

+5.77%

02/23/2013

Market Total Return (5 Yr)

+0.99%

02/23/2013

--

+5.20%

02/23/2013

+6.39%

02/23/2013

+0.17%

02/23/2013

Premium/Discount (1 Year Average)

-0.38%

01/31/2013

-0.40%

01/31/2013

+0.38%

01/31/2013

+0.34%

01/31/2013

+0.01%

01/31/2013

Beta (Month-End 3 Yr)

1.38

01/31/2013

0.48

01/31/2013

0.88

01/31/2013

0.90

01/31/2013

0.99

01/31/2013

Standard Deviation (Month-End 3 Yr)

24.40

01/31/2013

13.86

01/31/2013

19.39

01/31/2013

20.58

01/31/2013

21.88

01/31/2013

Sharpe Ratio (Month-End 3 Yr)

0.57

01/31/2013

0.72

01/31/2013

0.57

01/31/2013

0.56

01/31/2013

0.42

01/31/2013

Alpha (Month-End 3 Yr)

-1.41

01/31/2013

5.89

01/31/2013

3.47

01/31/2013

3.80

01/31/2013

0.83

01/31/2013

R2 (Month-End 3 Yr)

91.26

01/31/2013

47.14

01/31/2013

79.10

01/31/2013

73.83

01/31/2013

79.15

01/31/2013

Click to enlarge

Source: Fidelity.com

Recent Relative Returns, Betas and Sharpe Ratios (Best...a Trend?)

FUND

WISDOMTREE COMMODITY COUNTRY EQUITY FUND

WISDOMTREE MIDDLE EAST DIVIDEND FUND

WISDOMTREE EMERGING MARKETS EQUITY INCOME FUND

WISDOMTREE EMERGING MARKETS SMALLCAP DIVIDEND FUND

VANGUARD FTSE EMERGING MARKETS ETF

Price Performance (Last 5 Days)

-0.68%

02/22/2013

+0.81%

02/22/2013

-1.65%

02/22/2013

-0.65%

02/22/2013

-1.62%

02/22/2013

Price Performance (Last 4 Wk)

-1.37%

02/22/2013

+3.37%

02/22/2013

-3.02%

02/22/2013

+0.96%

02/22/2013

-1.95%

02/22/2013

Price Performance (Last 13 Wk)

+8.27%

02/22/2013

+10.31%

02/22/2013

+4.81%

02/22/2013

+9.64%

02/22/2013

+4.32%

02/22/2013

Price Performance (YTD)

+1.63%

02/22/2013

+8.57%

02/22/2013

-2.80%

02/22/2013

+2.14%

02/22/2013

-1.89%

02/22/2013

Performance (Last 1 Wk / 4 Wk)

+0.50

02/22/2013

+0.24

02/22/2013

+0.55

02/22/2013

-0.68

02/22/2013

+0.83

02/22/2013

Performance (Last 4 Wk/13 Wk)

-0.17%

02/22/2013

+0.33%

02/22/2013

-0.63%

02/22/2013

+0.10%

02/22/2013

-0.45%

02/22/2013

Beta (Month-End 1 Yr)

1.31

01/31/2013

0.46

01/31/2013

0.73

01/31/2013

0.71

01/31/2013

0.89

01/31/2013

Standard Deviation (Month-End 1 Yr)

18.02

01/31/2013

11.77

01/31/2013

14.24

01/31/2013

13.88

01/31/2013

16.44

01/31/2013

Sharpe Ratio (Month-End 1 Yr)

0.80

01/31/2013

1.15

01/31/2013

0.52

01/31/2013

0.99

01/31/2013

0.52

01/31/2013

Alpha (Month-End 1 Yr)

-5.94

01/31/2013

5.70

01/31/2013

-5.21

01/31/2013

1.42

01/31/2013

-6.87

01/31/2013

R2 (Month-End 1 Yr)

88.54

01/31/2013

41.84

01/31/2013

73.28

01/31/2013

72.97

01/31/2013

82.08

01/31/2013

Click to enlarge

Source: Fidelity.com

Disclosure: I am long GULF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.