1 Royal ETF To Buy Without Hesitation
Five years ago when I last visited Saudi Arabia, the kingdom closely resembled the image many westerners might imagine.
First, it was challenging just to figure out how to get a visa. The answer lay in a dark room in a difficult-to-access New York building. Upon arrival, there was no such thing as socializing with women. Only their eyes were visible. I stayed at a compound where primarily westerners reside, segregated from the main society at large behind massive security.
Fast forward a few years and life has changed substantially, and with it a massive inflow of capital. The top growth equity firms in the world court Mohammed bin Salman. Top British lawyers regularly visit to make deals. Sports consulting firms have their headquarters in Saudi Arabia. The place is teeming with energy and optimism.
And accompanying the capital inflows and transformations within society is an opportunity to buy one ETF that fails to receive a whole lot of attention yet has the potential to seriously outperform over the coming years.
Key Points
- The Saudi Arabian market has undergone a dramatic transformation in recent years, with a surge of capital inflows and significant changes in the social and economic landscape.
- The iShares MSCI Saudi Arabia ETF (KSA) provides a way to gain exposure to Saudi Arabia, and has attracted a lot of big money in recent years.
- While KSA has generated reasonable returns, its high volatility suggests it is best suited as a satellite holding within a diversified investment portfolio.
Which Royal ETF To Buy?
Saudi Arabia is a kingdom so we are loosely describing the exchange-traded fund in question as royal, but to be more precise symbol KSA represents the iShares MSCI Saudi Arabia ETF. (KSA is a play on words, the Kingdom of Saudi Arabia.)
A primary reason to consider KSA is that it provides exposure to the economic transformation occurring in Saudi Arabia. While the stories above are anecdotal, they are evidentiary of a broader trend of capital flows in The Kingdom that can be seen in the growing institutional ownership of the fund.
The fund itself comprises over 100 holdings spanning across sectors from banks to oil companies, and includes both mid-cap and small-cap firms too. It’s market-cap weighted as you might imagine and highly liquid with $900 million in assets under management and high daily average volume.
So, is it a buy?
Time to Buy KSA?
The thesis behind buying KSA is largely premised on the assumption that Saudi Arabia is and will be reducing its reliance on oil production. The signs of the kingdom making strides in this area have been most evident in the sports sector where high profile boxing matches have featured there as well as top sports stars such as Ronaldo arriving to much fanfare. Even LIV golf made a splash much to the initial chagrin of the PGA – those fences have largely been mended now.
In terms of performance, KSA has generated reasonable 3-year annualized returns of 9.01%, though volatility has historically been high so it’s more appropriate for a long-term portfolio that plans to commit to the broader thesis versus being a trading vehicle for short-term profits.
The other aspect worth considering is the future of KSA relative to other ETFs. Is it better to buy a cash-rich Saudi ETF with a rich future committed to economic and social transformation versus a more heavily indebted western firm that may be printing cash at high rates and creating high inflation for the foreseeable future. At the very least, it offers a measure of diversification.
With all that said, it’s not as cheap as we would like to see with a 0.74% expense ratio. Nonetheless for the exposure and diversification it provides, it may just be worth the cost.