One important question that is often overlooked when discussing the price of oil is asking who exactly profits (aside from seasoned futures traders) when fossil fuel prices rise. As you might have expected, the answer to the previous question has more than a handful of correct responses; one of these in particular may offer investors a lucrative investment opportunity overseas which has been flying under the radar for most. Gulf states like Saudi Arabia, Bahrain, and the United Arab Emirates are directly profiting from rising oil prices; however, what may surprise you is the fact that these countries are spending a growing portion of oil dollars at home.
In a recent Wall Street Journal article, authors Asa Fith and Liam Pleven take a closer look at a spending trend that is developing across Arab countries. The Gulf states are embarking on a massive domestic spending spree as their surplus accounts grow alongside rising oil prices. Countries like Kuwait and Oman are spending more and more oil dollars to finance domestic investments for new housing, infrastructure, and hospital projects. In fact, government outlays in the Gulf region are expected to reach nearly $490 billion this year according to the Institute of International Finance (IIF), a hefty 35% jump from spending in 2009.
These spending patterns create a lucrative environment as increasing government spending is bound to translate into more business opportunities for local companies. Mr. Abed of the IIF commented, “It shows that we are raising the floor of the oil price constantly because these countries are spending so much of their revenue on infrastructure, social services, expanding the civil service, investing in education and everything else”. As such, the Gulf states appear to be laced with attractive opportunities for those who can tap into this powerful trend.
Below we outline two ETFs which may benefit from growing domestic spending in the Gulf region:
GULF vs. MES
There are currently four ETFs which offer exposure to the Middle East, although only two of these offerings are focused on the Gulf states. The bigger of the two, although not by much, is GULF; this WisdomTree offering has approximately $14 million in assets under management since launching in July of 2008. GULF is linked to a fundamentally weighted index which is comprised of companies that pay regular dividends. This ETF is tilted towards the Gulf states from an portfolio composition perspective seeing as how companies from Qatar, Kuwait, and the United Arab Emirates receive the greatest allocations. From a sector breakdown perspective, GULF allocates close to half of its portfolio to financials, which may increase the sector-specific risk associated with this fund.
Consider the top ten holdings for GULF and MES below:
Click to enlarge.
MES, from Van Eck, launched around the same time as GULF, although it has gathered just under $13 million in assets under management likely because of its steeper price tag; GULF charges 0.88% in expense fees compared to MES which charges 0.99%. MES provides comparable exposure as it looks to track the performance of companies that are headquartered in countries belonging to the Gulf Cooperation Council (GCC) or generate the majority of their revenues in this region. Just like the holdings outlined in the table above, the top sector and country allocations between MES and GULF are nearly identical.
Although these two ETFs are fairly similar, GULF holds several advantages over its competitor that make it hard to pass up for cost-conscious investors; the WisdomTree ETF charges a cheaper expense fee and is also available commission free on the E-Trade platform.
Disclosure: No positions at time of writing.
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