Which Middle Eastern ETF Is The Best?

by: Nuqudy

The Middle East region is home to immense oil and gas reserves and to hundreds of millions of people, but also – very importantly – to growing economies whose performance is uncorrelated with the troubled economies of Europe and the USA.

ETFs should be a key instrument to allow investors to enjoy this market’s potential as a safe harbor from Western turmoil, yet - surprisingly – there are currently less than a handful which cover the region, and even these are not very representative.

At present, four ETFs traded in the United States cover the Middle East and North African (MENA). These ETFs manage a modest volume of assets, totaling around $225 million of assets (as of November 15th 2011), with very limited trading volume.

The largest MENA ETF is GAF, the SPDR S&P Emerging Middle East & Africa, with assets of $105 million, followed by the iShares MSCI Israel Capped Index Fund (NYSEARCA:EIS) with $83 million. Market Vectors Gulf States (NYSEARCA:MES) and Wisdom Tree Middle East Dividend Fund (NASDAQ:GULF) each have only $18 million in assets. The inception date of GAF was March 2007, while the other 3 ETFs were launched during 2008.

All the MENA ETFs posted negative returns in both 2010 and 2011 YTD, as we can see from the following table. The annual divided yield of the ETFs range from 1.06% in MES case to 5.59% in GULF ETF, while the number of issues held ranges from only 39 holdings for GULF to 139 for GAF.


Annual dividend yield

Expense ratio

Performance 2011 YTD

Performance 2010

top 10 holdings (as % of total)

Number of stock holdings

Total Assets


































A closer examination of the MENA ETFs shows that only a marginal fraction of the $225 million is indeed allocated to investments in the broad Middle East.

GAF’s asset allocation shows that there is no investment at all in the Arab Middle East. The vast majority of its investment are in international stocks (over 98%), primarily in basic materials companies such as Sasol (NYSE:SOL) and AngloGold Ashanti (NYSE:AU), and in financial services, such as Standard Bank Group (SBK). No investment (0%) is made in the Middle East, despite the ETF’s branding. The vast majority of the stocks in GAF have a connection to Africa, but not to the Middle East.

EIS, in contrast to GAF, does have the vast majority (over 99%) of its assets inside the Middle East, but only in Israel. There is no exposure to any company in the Arab countries which make up the overwhelming majority of the MENA region. The largest investments by EIS are in Israeli blue chip companies traded on US exchanges. Around one third of the ETF assets are channeled to only two Israeli companies: 24% of EIS is allocated to Israeli pharmaceutical giant Teva (NYSE:TEVA), and over 10% to Israel Chemicals (ISCHF.PK).

MES does actually allocate its major assets towards Arab companies. This ETF’s top ten investments, which account for roughly 60% of EIS assets, are invested in Arab companies, such as Qatar National Bank, Kuwait Finance House, National Bank of Kuwait, Emaar Properties and Qatar Telecom. EIS also has over 98% of its assets invested in Arab stocks. Kuwait and Qatar draw most of these investments, while Saudi Arabia, a major market, does not have even one local company in the list.

The other small MENA ETF – GULF - is also allocating most of its assets to investment in Arab companies. Again, all of its top ten holdings are devoted to Arab companies. Communication services and the financial sector are the leading sectors with over 60% of the total assets, while from a country perspective Qatar leads the list.

That the Middle East should be so under-covered by ETFs, especially in view of current economic developments, is an oversight that will cause investors to miss out on a valuable opportunity in the coming five-year period.

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