PAK ETF Surging On MSCI Upgrade

| About: Global X (PAK)

Pakistan has forayed into one of the world's most popular emerging markets equity indices - the MSCI Emerging Markets Index. The Pakistan stock market reacted positively to the news and reached record levels since the announcement of MSCI Inc., the key provider of global equity indexes. In fact, the sole ETF tracking Pakistan, the Global X MSCI Pakistan ETF (NYSEARCA:PAK) - also gained 4.6% in the last 5 days (as of June 20, 2016).

Pakistan has managed to get the MSCI upgrade thanks to high capital mobility and improved liquidity. Earlier this month, MSCI refrained from adding Chinese A shares in its emerging market index, due to persistent concerns pertaining to the Chinese economy and lack of accessibility.

With the MSCI upgrade in Pakistan's kitty, several analysts are of the view that it will lead to a significant boost in foreign investment after the reclassification of Pakistan to the emerging markets index, which is expected to happen in May 2017.

Pakistan is, by and large, an untapped Asian market for U.S. investors. The country's equity market had a bad start to 2016, thanks to the global sell-off and foreign investment outflow primarily from the oil & gas sector.

However, the country has been working on a turnaround. Pakistan's economy is growing at a decent rate of approximately 4.5% per annum. As per a California software company, NetSol Technologies, the country's 190 million population, with more than 50% being under 25 years of age, could also act as a key catalyst to long-term growth.

In a review of Pakistan's economic program, the IMF positively stated that the country is on a growth trajectory and is expected to benefit from low oil prices and strong investment due to the implementation of the China Pakistan Economic Corridor (CPEC). The aim of CPEC is to boost Pakistan's infrastructure and its industrial sector.

However, as a caveat, we would like to remind investors that like many other markets, Pakistan is also fraught with political tensions, which might hurt the stock market's potential to outperform at any given time. Additionally, stocks in developing countries generally have smaller market capitalization and lower levels of liquidity than those in large emerging markets. So, investors planning to invest in this market should have a relatively high risk tolerance.

Keeping these points in mind, we highlight the Global X MSCI Pakistan ETF. This ETF looks to track the MSCI All Pakistan Select 25/50 Index, which holds about 36 securities in its portfolio. The fund charges 92 basis points a year. The portfolio is heavily invested in financials, at 29% of assets, 29% of basic materials and 19% of energy. The top three companies of the fund have almost one-third exposure. The fund has total assets of $9.1 million with paltry volumes of 5,000 shares.

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