FTSE Russell launches Saudi Arabia Index Series

Oct 30th, 2017 | By | Category: Equities

FTSE Russell has launched the FTSE Saudi Arabia Inclusion Index Series, a comprehensive suite of indices designed in response to regional growth and the opening of the country’s capital markets to Qualified Foreign Investors (QFI).

FTSE Russell launches Saudi Arabia Inclusion Index Series

FTSE Russell anticipates reclassifying Saudi Arabia as a Secondary Emerging Market in 2018.

The index series has been constructed to be suitable for index-linked investment products, such as ETFs, and includes three sets of indices at the country, regional, and global level.

There are two versions of the country-level indices – the FTSE Saudi Arabia Indices for QFIs, and the FTSE Saudi Arabia Free Indices for domestic Saudi investors.

The indices are broad benchmarks covering all eligible Saudi stocks listed on Tadawul, the country’s only stock exchange. Capped versions and sector indices are also available.

The global Saudi Inclusion Indices combine various FTSE global indices with Saudi Arabia indices, at FTSE Global All Cap, FTSE All-World and FTSE Emerging levels. The regional Saudi Inclusion Indices combine various FTSE regional indices with FTSE Saudi Arabia Indices, at Middle East and Africa (ME&A), Middle East and North Africa (MENA) and GCC levels.

The indices will likley find use as transitional tools in preparation for the potential inclusion of Saudi Arabia in the widely-followed FTSE Global Equity Index Series (FTSE GEIS).

In September 2017, FTSE Russell announced its annual country classification, which confirmed that Saudi Arabia remains on the firm’s watch list for possible inclusion as a Secondary Emerging Market within FTSE GEIS.

Saudi Arabia is increasingly gaining attention from global investors on the back of encouraging capital market reforms being implemented in the country. The centrepiece of Crown Prince Mohammed bin Salman’s ambitious reform program is the planned 2018 IPO of oil-giant Aramco. The state-owned company will aim to raise $100 billion in what is expected to be the world’s largest equity listing, valuing the company at $2 trillion.

The London Stock Exchange, part of the group that owns FTSE Russell, is in the running to be selected as the listed venue for this flotation.

According to FTSE Russell, Saudi Arabia has taken a number of positive steps to increase the openness and effectiveness of its markets and, as a result of these reforms, it is anticipated that Saudi Arabia will meet the requirements for inclusion as a Secondary Emerging Market from early 2018.

Mark Makepeace, CEO of FTSE Russell said: “FTSE Russell has strong relationships in the Middle East and we are delighted to launch the new stand-alone country indices for the Saudi Arabian market. Alongside this, the Saudi Arabia inclusion indices are a very positive step for the market and country as a whole and we will now begin work with institutional and market practitioners to prepare for the anticipated classification of Saudi Arabia as a Secondary Emerging market. We look forward to working with Tadawul to further develop the index series and create innovative index products for this market”.

Khalid Al-Hussan, CEO, Tadawul added: “We are firmly committed to the growth and development of the financial markets in Saudi Arabia and have undertaken wide-ranging reforms to enhance market access, transparency, governance and efficiency. We are pleased that FTSE Russell has launched this new dedicated Saudi Arabia index series alongside the global and regional Saudi inclusion indices, which we believe represents further progress in our efforts to create an attractive investment climate for international and domestic investors.”

While the indices have been constructed with a methodology that is consistent with FTSE GEIS, which is familiar to international investors, it may be some time before investors are able to gain exposure to them via ETFs as further capital market reform will likely be required.

At the moment there are no ETFs listed in Europe which provide dedicated access to Saudi Arabia’s equity market; Deutsche’s db x-trackers MSCI GCC Select Index UCITS ETF comes closest, with an approx 60% weight to the country.

In the US, however, an exclusively Saudi-focused ETF does exist. BlackRock offers the iShares MSCI Saudi Arabia Capped ETF (NYSE Arca: KSA) which tracks the MSCI Saudi Arabia IMI 25/50 Index. This index provides market cap-weighted exposure to the largest stocks listed on Tadawul, ensuring that no single issuer exceeds 25% weight, and all issuers with a weight above 5% do not cumulatively exceed 50% of the underlying index weight. KSA has assets under management of $17 million and a total expense ratio (TER) of 0.74%.

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