The Kingdom Is Coming to Emerging Markets

The iShares MSCI Saudi Arabia ETF (KSA) is up nearly 12% year to date, making it one of this year's best-performing single-country exchange-traded funds (ETFs) while offering sharp outperformance of the MSCI Emerging Markets Index. One of the primary reasons KSA and Saudi stocks have been soaring is anticipation that at least one of the major index providers would elevate the kingdom to emerging markets status. That happened Wednesday when FTSE Russell became the first index provider to deem Saudi Arabia an emerging market.

"The market authorities in Saudi Arabia have taken the required steps to implement market reforms and now meet the formal requirements to be included in FTSE GEIS," said FTSE Russell in a statement issued after the close of U.S. markets Wednesday. "Changes include the introduction of enhancements to the Independent Custody Model (ICM) and the further opening of the Saudi Arabia capital market to Qualified Foreign Investors (QFI), which was initiated in 2015 and enhanced in 2018." (See also: How to Invest in the Saudi Arabia Stock Exchange.)

KSA, the only Saudi Arabia ETF trading in the U.S., tracks the MSCI Saudi Arabia IMI 25/50 Index. However, FTSE Russell's decision to elevate the kingdom to emerging markets status could pave the way for Saudi stocks to join some well-known ETFs. For example, the Vanguard FTSE Emerging Markets ETF (VWO), the largest emerging markets ETF, tracks a FTSE index.

"FTSE Russell will begin including Saudi Arabian domestic stocks into FTSE GEIS from March 2019. Saudi Arabia will be the largest Middle East market in the FTSE Emerging Index with an overall weighting of c. 2.7%," said FTSE Russell. "Due to this large projected size within the FTSE Emerging Index, FTSE Russell proposes to implement the inclusion of Saudi Arabia in several tranches to assist index trackers in their ability to efficiently replicate the underlying benchmark change. The inclusion is expected to be fully completed by December 2019."

FTSE rival MSCI, Inc. (MSCI) currently classifies Saudi Arabia as a standalone market. However, MSCI does have Saudi Arabia on its list for possible inclusion in the MSCI Emerging Markets Index. That decision is expected to be announced in June. Around $2 trillion in international investment assets are benchmarked to the MSCI Emerging Markets Index.

Investors are eagerly embracing KSA ahead of the major index announcements. As of March 27, KSA had $133.7 million in assets under management, of which $111.6 million has flowed into the fund just this year.