First, Qatar was awarded soccer’s World Cup in 2022. Now the country and its neighbor, the United Arab Emirates (UAE), have stand-alone exchange-traded funds to call their own with this week’s launch of the iShares MSCI Qatar Capped ETF (QAT) and iShares MSCI UAE Capped ETF (UAE). These achievements in the worlds of football and funds indicate the Middle East is growing in stature beyond just oil.
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. For both the FM fund and its underlying index, the removal of the UAE and Qatar will reduce their top-heavy reliance on the Middle East and create greater geographic diversification.
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 seven UAE emirates are Abu Dhabi (the capital), Ajman, Dubai, Fujairah, Ras Al Khaimah, Sharjah and Umm Al Quwain.
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.