A Qatari-focused exchanged-traded fund fell sharply this week following news that Saudi Arabia and three other Arab countries cut most diplomatic and economic ties to the tiny Gulf nation, citing Qatar’s ties to Iran and Islamist groups.
The iShares MSCI Qatar Capped ETF (QAT) fell 9.09 percent on Monday. Even before Monday’s news, the fund was down on the year due to weakness in the energy sector. It’s down 10.34 percent year-to-date.
Qatar is the smallest member of the Organization of Petroleum Exporting Countries. According to OPEC, oil and natural gas account for about 55 percent of the country’s gross domestic product.
Tushar Yadava, vice president and investment strategist in the iShares U.S. investment strategy team, says Qatar’s local stock exchange has been one of the worst performing global indexes this year, reflecting the weakness in the region.
“It is an area that’s very dependent on natural gas, as well as oil, so the energy sector is a large component. That’s been one of the biggest year-to-date drags on total return,” he says, adding that energy woes have hurt downstream industries like materials and industrials.
QAT follows the MSCI All Qatar Capped Index, which measures Qatar’s equity market. It’s a free-float market capitalization-weighted fund, so no single holding exceeds 25 percent and all issuers with a weight above 5 percent won’t cumulatively exceed 50 percent of the index.
Launched in April 2104, the fund has an expense ratio of 0.64 basis points and $38.4 million in assets under management.
QAT is heavily weighted in financials, with Qatar National Bank representing 21.45 percent of the fund. The commercial bank is Qatar’s biggest bank and the largest financial institution in the Middle East and Africa region. In all, financials make up 53.86 percent of the fund—six of the top 10 holdings are banks. Industrials comprise 14.45 percent of the fund and real estate is at 12.27 percent, with energy at 4.48 percent.
Yadava says it’s common for small emerging-market indexes to be driven by the financial sector. Banks usually are one of the first to seek private capital since states are slow to relinquish control of their state-owned industries. However, the global financial sector doesn’t have very much influence on the fund because Qatar’s financial sector is still largely domestic-focused.
The country may be best known to outsiders for being selected to host soccer’s World Cup in 2022, and Qatar’s big banking sector is helping to bankroll construction ahead of this global event. However, Yadava says, it’s been tough to gauge the impact that World Cup preparations have had on the economy since there haven’t been any public updates about the progress of construction or its costs.