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BlackRock launches stand-alone ETF for UAE

difcThe United Arab Emirates will have its own stand-alone exchange-traded funds with this week’s launch of the iShares MSCI UAE Capped ETF (UAE).

On May 30th, both Qatar and the UAE will get promoted by the MSCI index folks being frontier markets to becoming full-fledged emerging markets. As of this year’s first quarter, the UAE and Qatar occupied the second- and third-largest country weights in the MSCI Frontier Markets index, at roughly 18 percent and 16 percent, respectively. Another Middle East nation, Kuwait, had the largest country weight.

As of May 1, both the UAE and Qatar accounted for roughly 18 percent of the iShares MSCI Frontier 100 ETF (FM). They will no longer be included in that fund after they officially become emerging markets.

Due to how seeding money was raised, the UAE fund is the larger of the two with a market cap north of $17 million. The fund tracks the MSCI All UAE Capped Index composed of the securities of companies headquartered or listed in the UAE and which have the majority of their operations based there. The ETF’s 26 holdings essentially comprise four sectors: financials (70 percent of market capitalization); industrials (20 percent) and health care and energy (4 percent each).

The Qatar ETF, which has a market cap of more than $7 million, tracks the MSCI All Qatar Capped Index comprised of securities of companies based or listed in Qatar and which have most of their operations based there. On a market cap basis, the fund’s 25 holdings are more widely distributed across different sectors: financials (56 percent); telecom (14 percent); industrials (13 percent); energy (7 percent); utilities and materials (both at 4 percent) and consumer staples (1 percent).

Both funds have an expense ratio of 0.61 percent, and their underlying indexes are free float-adjusted market capitalization-weighted and designed so that no single holding exceeds 25 percent. In addition, all issuers with a weight more than 5 percent won’t exceed 50 percent of the index weight in aggregate.

According to iShares’ parent company, BlackRock, the elevation of Qatar and the UAE is the first time any country has been promoted by MSCI from a frontier market to an emerging market. They are also the first members of the Gulf Cooperation Council (GCC) to be included in the MSCI Emerging Markets index. The GCC also includes Bahrain, Kuwait, Oman and Saudi Arabia.

Both countries merited their promotions thanks to the development of their securities markets, as well as their past and future expected growth rates. But with their significant  oil wealth, Qatar and the UAE in some ways aren’t your typical emerging markets because they both are among the world’s leaders in per-capita wealth.

“So while some traditional EM themes such as rising incomes and demographic trends may be less relevant as an investment premise, expansion and diversification opportunities prevail,” BlackRock said in an April report on Qatar and the UAE.

BlackRock says the two countries potentially provide emerging market-like opportunities in other ways. “The ratio of market capitalization to GDP remains low in UAE and moderate in Qatar, and is therefore still likely to rise over time as is generally expected of emerging markets.”

In making the case for the two countries, BlackRock says the Middle East has had some of the strongest growth rates in the world since the 2008 financial crisis. In particular, the Qatari economy grew nearly 67 percent between 2008 and 2013, and its world-leading GDP per capita is forecast to double between 2014 and 2025 thanks to World Cup-related infrastructure spending and to falling production costs in petroleum.

BlackRock’s report, which doesn’t provide comparable figures for the UAE, does say that country’s GDP per capita growth hasn’t been as dynamic in recent years because economic expansion has struggled to keep pace with rapid population growth.

That said, International Monetary Fund statistics show the UAE’s real GDP growth last year was a robust 4.8 percent, though that’s expected to decrease to 4.4 percent and 4.2 percent this year and next year, respectively.

Qatar’s real GDP growth last year was 6.1 percent, according to the IMF, which forecasts growth of 5.9 percent this year and 7.1 percent next year.-Financial Advisor