BlackRock has expanded its line-up of ETFs providing exposure to the Middle East with the launch of a new fund targeting the equity market of Kuwait.
MSCI is expected to promote Kuwait to emerging market status in December 2020.
The iShares MSCI Kuwait ETF (KWT US) has listed on Cboe BZX Exchange and comes with an expense ratio of 0.74%.
The fund, which has been seeded with $5m, tracks the MSCI All Kuwait Select Size Liquidity Capped Index through physical replication using a sample-based approach.
The index consists of companies that are either listed, headquartered, or carry out the majority of their operations in Kuwait.
There are currently 30 constituents in the index which is weighted by market capitalization subject to a 25% cap per security and an aggregate cap of 50% on all securities with weights above 5%.
The vast majority (95.5%) of the index weight is allocated to stocks listed in Kuwait, while the remaining 4.5% is linked to Bahrain.
While Kuwait’s economy is heavily dependent on oil, most of the producers are controlled by the state. Consequently, the weight of the energy sector in the index is just 0.3%.
Instead, financials dominate the sector profile with a weight of 63.7%, primarily attributable to the index’s two largest constituents – National Bank of Kuwait (23.2%) and Kuwait Finance House (19.3%). Stocks from the industrials sector also play a significant role with a weight of 14.9%, while the next largest sector exposures are materials (6.0%), real estate (5.0%), and communication services (4.6%).
BlackRock now offers four Middle East-focused, single-country ETFs linked to MSCI indices, the largest of which is the $500 million iShares MSCI Saudi Arabia ETF (KSA US). Investors can also gain targeted exposure to the stock markets of Qatar and the United Arab Emirates through the $90m iShares MSCI Qatar ETF (QAT US) and the $40m iShares MSCI UAE ETF (UAE US).
Kuwait’s transition to EM status
Kuwait has undergone an economic overhaul in recent years in a bid to reduce its dependency on oil revenues, attract greater foreign investment, and expand the private sector.
On the capital markets front, the country has made several advancements including removing foreign ownership restrictions on listed banks, simplifying requirements for investor registration, moving to a T+3 settlement cycle for both local and foreign investors, and introducing new delivery versus payment (DvP) settlement provisions and a proper failed trade management process.
These enhancements have been well received by index providers with both S&P Dow Jones Indices and FTSE Russell upgrading Kuwait from frontier market to emerging market status last year, in the process boosting passive and active asset inflows into the state.
MSCI had intended to include Kuwaiti stocks within its MSCI Emerging Markets Index in May 2020, as part of its Semi‐Annual Index Review. This action was postponed, however, until December 2020 due to the Covid-19 pandemic. This means investors potentially still have the opportunity to front-run what may prove to be the largest inflows linked to an index provider’s reclassification.