Behaving As Expected: Saudi Arabia ETF Rises With Oil

The United States Oil Fund USO, which tracks front-month West Texas Intermediate futures, is trading modestly higher today, adding to a one-month gain that now stands just over seven percent.

Oil's recent recovery, albeit muted relative to the lengthy bear market the commodity remains mired in, has lifted an array of exchange traded funds. Consider this: Over the past month, nearly a third of the top 30 non-leveraged ETFs in terms of percentage gains are energy funds, according to ETF Screen data. That bullishness, which comes with the caveat of a potentially short shelf life, is trickling down to some single-country ETFs.

That includes newly minted fare such as the iShares MSCI Saudi Arabia Capped ETF KSA. Correlations between oil and the iShares MSCI Saudi Arabia Capped ETF are to be expected. After all, Saudi Arabia is the largest producer in the Organization of Petroleum Exporting Countries (OPEC) and when KSA debuted about a month ago, it was those expected correlation that made the ETF's launch look ill-timed because crude prices had been spiraling lower in the week's leading up to the ETF's debut.

Fortunately for KSA, the fourth country-specific ETF dedicated to an OPEC member state, oil prices have bounced back. The ETF is participating in that rebound, having posted a gain of more than five percent since coming to market. 

As is the case with other single-country OPEC ETFs, such as the iShares MSCI Qatar Capped ETF QAT and the iShares MSCI UAE Capped ETF UAE, KSA features scant energy sector exposure. In the case of the first Saudi Arabia ETF, the fund's energy weight is less than 1.4 percent, according to iShares data, because the giant Saudi oil producers are controlled by the government, not listed on publicly accessible equity bourses like European and U.S. oil companies. 

The new Saudi ETF was made possible by the kingdom's efforts to open its financial markets, though on a somewhat limited, to foreign investment in a bid to reduce the economy's dependence on oil. The iShares MSCI Saudi Arabia Capped ETF follows the MSCI Saudi Arabia Investable Market Index (IMI) 25/50 Index.

Like many emerging and frontier markets ETFs, classifications Saudi Arabia does not yet have, KSA is heavily allocated to the financial services sector. The ETF's weight to that group is 32.6 percent and that does leverage the fund to oil prices because large banks throughout the Arab OPEC countries are the financers of those nations' energy projects.

To date, KSA has attracted just $3.9 million in assets, but it is not unreasonable to expect that number to rise if oil prices do the same.