New Middle East Oil Kingpins ETF: More Concentrated, Slightly Pricier

By Murray Coleman

A third exchange-traded fund investing in Middle Eastern oil kingpins is now out, offering a more concentrated and a bit pricier portfolio.

The Gulf States Index ETF (NYSE: MES) launched on Thursday. It tracks a Dow Jones index of public companies headquartered or doing most of their business in Gulf Cooperation Council countries.

The GCC was set up in 1981 both as an economic alliance as well as a way for the six-member nations to protect themselves against geopolitical threats in the region. Each also endorses free-trade policies and has set up a common marketplace to exchange goods and services.

Major corporations are working to establish a presence in the GCC countries. General Electric's revenues in the region jumped 50% last year. The U.S. conglomerate also just set up a joint venture there to have a GE Capital unit in the Mideast.

"Given the current completive landscape, if an ETF investor wants pure exposure to the countries around the Persian Gulf, this is the only one focused on the GCC states," said Harvey Hirsch, Van Eck Global's senior vice president.

As of July 10, the ETF's benchmark included five GCC countries: Kuwait (52.3%); United Arab Emirates (25.8%); Qatar (14.9%); Oman (4.4%) and Bahrain (2.6%). Saudi Arabia, a driving force behind formation of the GCC, was not listed in the index at that time.

"Currently, the index doesn't include stocks from Saudi Arabia because the country isn't open to foreign investment," said Adam Phillips, managing director at Van Eck.

The major sector weightings covered by the underlying index for MES included: banks (38.5%); financial services (21.6%); real estate (10.5%); technology (7.6%); construction and materials (7.2%); industrial goods and services (7.1%); telecom (3.6%).

The index has gained more than 6.5% so far this year and 28%-plus in the past 12 months, according to Dow Jones.

Large-cap stocks, or those with more than $6 billion in market capitalization, made up 37.7% of the benchmark earlier this month. Mid-caps, starting at around $1.5 billion in size, comprised 47.1% of the weightings. At the same time, small-caps held about 15.2%.

The ETF's index tracks 40 companies in the GCC using a modified market-cap size weighting methodology. It's expected to wind up with an annual net expense ratio of 0.98%. That's slightly more than the Invesco PowerShares MENA Frontier Countries Portfolio (Nasdaq: PMNA). It's based on the NASDAQ OMX Middle East North Africa Index and charges 0.95%.

Both PMNA and the WisdomTree Middle East Dividend Fund (NASDAQ: GULF) launched earlier this month. (See related article here.) The PowerShares fund, which was the first Middle East centric ETF to launch on July 9, has attracted nearly $20 million since then. WisdomTree's GULF, which came out on July 16, has slightly less than $5 million in assets.

Besides offering different cost structures and sector weightings to the region, MES also provides investors a way to segment their Middle Eastern portfolios more. Both GULF and PMNA include the same countries, but in much smaller doses.

So why play such developing markets, which can be incredibly volatile, with such a focused theme?

"The other indexes for the other ETFs include North Africa -- Morocco and Egypt. The Dow Jones index we use doesn't include either of those countries," said Van Eck's Hirsch.

The reason why this ETF is targeting GCC countries, he added, is to provide the most direct exposure for U.S. investors to markets reaping the most benefits from rising demand for oil. "It's not just the demand for oil, but the influx of petro dollars into GCC countries," Hirsch said.

• More on choosing the right ETF

Comments

[Charlie Str...:]

Thanks for this piece, Murray, because MES looks awesome since the most undervalued Middle Eastern stock markets are Kuwait and Bahrain (based upon a 12 month trailing PE ratio). As an aside, Egypt is potentially vulnerable to Lebanon- like strife and other problems which is another reason I prefer MES.

Disclosure: long Middle Eastern equities (with the exception of Iran) since the start of the Iraq War.

2008 Jul 25 08:52 AM

[Charlie Str...:]

liveinvt, MES doesn't include stocks from Saudi Arabia, and from an economic perspective it is better for some to profit from war than none at all (even though the Iraq War was a colossal mistake).

2008 Jul 25 10:31 AM

[Itsonlymoney:]

I applaud any discussion in these pages that honestly inquires into profit and war. I have always looked at military spending, while allowing for its necessity, as a tax by diverting capital from the means of production to destruction. The US allocates more money for defense than all other nations combined. Is this out of whack? That said, some interesting economic adventures are now originating in the Gulf States since they are now recipients of an enormous cash flow. World peace through prosperity has as good a chance as any and is more likely to succeed than warfare.

2008 Jul 25 11:20 AM

[Jason Rines...:]

"Could there be a way to invest your money in a more 'evil' manner? Banks and GE in Arabia? Talk about betting on "the market"....

Disclosure: I hate war profiteers"

What we all want as investors is to invest in American enterprise where the benefit is for our famalies. When government watches it's own interests instead of the people and creates economic deflation, it forces us to work for someone less less desirable. It bugs me also to consider I may need to work for someone in Arabia someday as I know some of this money will further fall into the hands of militant Islam. But that does not mean I will not work for someone whom will pay the bills. I would prefer in some ways working for the Arabs then working for our own government. That is indeed so sad to even admit and it causes confusing emotions as to what our nation has become. We are the whorehouse of the entire world now and in the whorehouse, the ladies tend to get abused. Disgusting.

2008 Jul 25 01:31 PM

[ThinkClearly:]

Regarding the Article
The article misses the most important fact. GCC companies may grow at 0% or they may grow at 20%. However the bigger picture is if some of these countries de-link from the dollar to fight inflation their currencies will appreciate and the price of oil will go up in dollar terms (at least thats my humble opinion). I would be interested in a discussion if this would impact the ETF in USD terms more than the actual performance of the companies.

Regarding the comments:
This is an investment site. However even if this was about morality the comments are show some serious ignorance. The companies in the ETF are doing well without the war - the war is just increased revenue supporting US military operations. Most importantly from a moral perspective all the GCC countries were against the war except Kuwait which was recently attacked by Iraq. The typical GCC company is in real estate, tourism, financial services, logistics and field services. The big culprits, if people want to invest with some morals are companies that help Saudi Arabia with oil or help manage oil in Iraq - these are almost all US companies - many based in Texas. And lets remember US citizens overwhelmingly wanted to go war - not the GCC countries. What kind of logic is not to invest in the most economic liberal, transparent countries, with a semblance of proper accounting (and which have produced ZERO terrorists) when our government gives thousands of times more money to Saudi Arabia than this minuscule ETF? Saudi Arabia is the home of 9-11!1 If you are concerned about money going to the wrong place write your senator. I have six times. Money invested in markets is always more transparent that other channels.

2008 Jul 25 02:20 PM

[Charlie Str...:]

ThinkClearly, I agree with both of your points, and I also agree with the Harvard University economist Jeffrey Frankel who advocates that the major oil exporters should peg their currencies to a basket of currencies that includes the export price of oil.

As both a hedge and as an investment, I am also long the Middle Eastern currencies.

2008 Jul 25 03:11 PM

[David Hunkar:]

Neat post.The gulf countries are undergoing a great economic boom.Dubai is fast becoming a financial hub with many construction projects underway. Overall investors looking for decent profits will go to places where they can it - even it means putting their money in middle east companies.

2008 Jul 26 11:44 AM