Pakistan's Weight In This ETF Is Set To Soar

Includes: EMFM, EMHD, FM
by: Tom Lydon


Stocks in Pakistan gained 49.4% last year.

MSCI plans on increasing Pakistan's exposure in its frontier market index.

How to gain exposure to Pakistan's market through ETFs.

For the adventurous, and usually, professional investor, Pakistan has been a rewarding place to invest. Pakistan, classified as a frontier market, was the world's fifth-best equity market regardless of market classification last year.

In local currency terms, stocks in Pakistan gained 49.4% last year, topping the S&P 500, every benchmark index in Europe and plenty of other emerging and frontier markets along the way. The country is somewhat hard to access for most investors, though one notable exchange traded fund appears likely to increase its allocation to Pakistani stocks in the near-term.

Index provider MSCI (NYSE:MSCI) said it will boost Pakistan's weight in the MSCI Frontier Market 100 Index to 8.9%. That index is the underlying index for the $659.9 million iShares MSCI Frontier 100 ETF (NYSEARCA:FM), where Pakistan is currently the sixth-largest country weight at just 4.4%.

Pakistan's increased weight in the frontier index means the combined weight to Kuwait and Nigeria will be trimmed to 40% from 51.3%. It was expected that after Qatar and the United Arab Emirates leave the frontier index next month for the MSCI Emerging Markets Index that Kuwait and Nigeria would combine for over half of the index and FM's weight.

Pakistan was demoted to frontier status in 2009 after its equity market was closed to sellers for over 100 days during the 2008 global financial crisis, according to news reports. Although Pakistan's weight in FM will not increase until next month, according to The Express Tribune:

The impact of the decision was felt immediately. Foreigners purchased a net of $35.8 million worth of equity at the bourse (last) week and were the prime reason behind the KSE-100's strong performance.

Another ETF already allocates more than 8% of its weight to Pakistan: The EGShares EM Dividend High Income ETF (NYSEARCA:EMHD), which debuted in August 2013. Pakistan is EMHD's fifth-largest country weight at 8.1%.

EMHD's 48 holdings are reasonably valued, even by the current standards of emerging markets stocks. The ETF sports a P/E ratio of 8.8 and a price-to-book ratio of almost 1.2, according to EGShares data. Pakistan has pushed to regain its emerging markets status, but has thus far been unsuccessful.

iShares MSCI Frontier 100 ETF Country Weights

Chart Courtesy: iShares

ETF Trends editorial team contributed to this post.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.