Volume Spikes in Frontier ETFs as Dubai Stocks Surge

This is not a misprint: On Thursday, the iShares MSCI Frontier 100 ETF FM rose almost 1.5 percent to hit a new all-time high on volume that was over 30 times the daily average. The iShares MSCI Frontier 100 ETF was not the only frontier markets fund that was home to some unusual volume Thursday. The WisdomTree Middle East Dividend Fund GULF, a more concentrated regional play than FM, also hit a new 52-week high on volume that was nearly double the daily average. There was at least one obvious catalyst behind the volume spikes in FM and GULF: Stocks listed in Dubai raced to a 54-month high Thursday and the trickle-down effect to select ETFs was palpable. Dubai is one of the United Arab Emirates. That country accounts for 37.3 percent of GULF's weight, making it that ETF's largest country exposure. UAE is FM's fourth-largest country weight with an almost 12 percent allocation. Those that follow select Middle East markets probably were not surprised by Thursday's moves in FM and GULF. Dubai stocks have been among the worst most impressive performers this year and the Dubai Financial Market General Index (DFMGI) is now up more than 52% year-to-date. Even with that stellar performance, Dubai stocks are not expensive. Shares there trade at just 10 times this year's earnings. By comparison, FM, which features Kuwait, Qatar and Nigeria ahead of UAE in its lineup, has P/E ratio of 15.59, according to iShares data. Compelling valuations are not the only reason investors are warming to the Dubai stocks. Nor is Dubai the region's only market that is capturing investors' interest. Qatar-listed stocks have surged 16.6 percent this year. That is crucial information to shareholders of GULF and FM because Qatar accounts for 28 percent and 16.7 percent, respectively, of those ETFs. A catalyst that was highlighted early this month and a again last week is driving Dubai and Qatar stocks along with FM, Gulf and rival ETFs higher. Arabian Business attributed some of the Thursday buying to speculation UAE will be upgraded to emerging market status when Index provider MSCI MSCI announces its annual index reclassification on June 11. Qatar is also in line for the same promotion. MSCI previously confirmed that its Qatar and UAE indexes are being reviewed for a possible upgrade to emerging markets status. Risks The ebullience surrounding GULF and rival ETFs such as the PowerShares MENA Frontier Countries Portfolio PMNA is not risk-free. Given MSCI's history of not upgrading those countries to developed market status, investors may not want to bet on the promotion happening. That is not a doomsday prediction, it is merely stating obvious reality. MSCI, as Arabian Business reported, has snubbed Qatar and UAE five times for emerging markets promotion. Another snub could give doubters that think UAE stocks are overbought an opportunity to sell, creating headwinds for the aforementioned ETFs. PMNA, the PowerShares offering, allocates more than half its combined weight to UAE and Qatar. A Tradeoff Pensive investors that believe MSCI will keep Qatar and UAE designated as frontier markets can stick with FM. That ETF, which has attracted over $121 in assets in less than a year of trading, devotes 28.5 percent of its weight to Qatar and UAE, a small amount of compared to GULF and PMNA. FM's 27 percent weight to Kuwait is certainly helping the ETF as the Kuwait Stock Exchange Index is 44.5 percent this year. Nigeria, which is not featured in the other ETFs mentioned here, has also been making a decent contribution to FM's 2013 upside. Importantly, stocks in Qatar, UAE and Kuwait rallied for several months before the MSCI announcement, which was not much of a surprise because the first two have been close to promotion in the past. Regarding UAE stocks, Dubai shares are still about 60 percent below their January 2008 highs, implying there might be more upside to be had regardless of what MSCI says in June. For more on ETFs, click here.