BlackRock’s Saudi ETF may see limited interest, analyst says

U.S. investment firm BlackRock’s recent launch of the iShares MSCI Saudi Arabia Capped exchange traded fund (ETF) represents a new channel for attracting foreign investments to the kingdom, an industry analyst said on Sunday.

The fund’s launch, however, comes at a time when global market volatility is likely to linger, especially after the U.S. Federal Reserve’s decision to keep interest rates unchanged. Declining oil prices have also put a damper on the investment climate within the GCC region.

“Such an environment could pose challenges for the fund’s performance as well as its potential to gather assets in the short-term,” Anirban Kundu, head of investment advisory research at Saudi Fransi Capital told Argaam Plus.

“Over, a longer period, though, such exposure is one of the key pillars to building a diversified efficient GCC equity portfolio,” he added.

The ETF tracks the MSCI Saudi Arabia IMI 25/50 Index, which includes 50 large, mid and small-cap stocks that make up around 99 percent of the free float-adjusted market value in the kingdom. The index allocates 30 percent to both financials and materials industries, while telecommunications is also a major area of focus. Only 1.4 percent is invested into energy stocks.

“Most institutional investors are likely to view the Saudi equity market as an active investing opportunity and for these entities, an ETF (which primarily is a beta product) is unlikely to be of great interest,” Kundu said. “Since the ETF will track the broad index, it provides for adequate diversification for a relative return vehicle.”

He also expects similar ETFs to launch on the back of BlackRock’s fund, especially if it proves to show attractive performance metrics over the coming quarters. However, he points out that previously launched Saudi-focused ETFs by HSBC and Falcom “have not had great degrees of success in attracting assets.”

New York-based Van Eck has two Saudi Arabia-based ETFs in registration with the Securities and Exchange Commission (SEC). Meanwhile, Ashmore Group, Harding Loevner, Acadian Asset Management, Fidelity Investments, and Morgan Stanley are looking to invest in the market, according to a recent report published by Reuters.