As reported at IndexUniverse, another ETF focusing on the Middle East is available. The new fund, called the Gulf States Index ETF (NYSEArca: MES), tracks the Dow Jones index of public companies headquartered or doing most of their business in Gulf Cooperation Council (GCC) countries - an economic alliance between six Gulf State member nations. The focus on the GCC is what makes this ETF unique. The current weightings in the index include: Kuwait (52.3%), United Arab Emirates (25.8%), Qatar (14.9%), Oman (4.4%), and Bahrain (2.6%). As with the other Gulf State ETFs, Saudi Arabia is not included since it does not have any companies open to foreign investment.

The ETF is heavily weighted in the banking and financial services sector, with over 60% of the total weighting. The sector breakdown includes banks (38.5%), financial services (21.6%), real estate (10.5%), technology (7.6%), construction and materials (7.2%), industrial goods and services (7.1%), and telecommunications (3.6%). Large-caps currently make up 37.7% of the fund, mid-caps are at 47.1% weight, while small-caps make up the remaining 15.2% of the fund.

The annual net expense ratio of the fund is 0.98%, which is a little more than the Invesco PowerShares MENA Frontier Countries Portfolio (PMNA), which we discussed in an earlier post. Another recently offered fund for those interested is the WisdomTree Middle East Dividend Fund (GULF).

A few months ago BullBearTrader highlighted a U.S. News and World Report interview with Jon Auerback, in which he discussed potential new BRIC-type countries (see the original article, or initial post). In the article Auerback mentions Nigeria, Zimbabwe, and Kenya as potential regional opportunities. Other analysts and investors have also begun to talk about Africa as being one of the next regions for achieving above average growth and investment opportunities, even given some of the political, economic, and inflationary risks that still exists.

To take advantage of current and future redistribution of capital into Africa, Van Eck Global is offering a new frontier market exchange traded fund called the Market Vectors Africa Index ETF (AFK). For more information, see the IndexUniverse article, or read the prospectus. The AFK is not the first vehicle to begin tracking the performance of companies domiciled or operating in Africa. In a recent post we discussed the newly offered PowerShares MENA Frontier Countries Portfolio (PMNA). The PMNA tracks the Nasdaq OMX Middle East North Africa Index, which includes the countries of Bahrain, Egypt, Jordan, Kuwait, Lebanon, Morocco, Nigeria, Oman, Qatar, and the United Arab Emirates.

The AFK is unique in that it follows the Dow Jones Africa Titans 50 Index, covering 50 stocks from 11 different African markets, including Nigeria (32.5% weight total, 25.2% onshore, 7.3% offshore), South Africa (26.2% total, 24.7% onshore, 1.5% offshore), Egypt (13.1%), Morocco (11.4%), Equatorial Guinea (6.2% offshore), Zambia (3.4% offshore), Angola (2% offshore), Mali (1.7% offshore), DR Congo (1.5% offshore), Kenya (1.2%), and Ghana (0.7% offshore).

A few points are worth noting about the index. For one, not all of the companies in the index are domiciled in Africa but are nonetheless included since they derive a majority of their revenues from African markets - thus the classification of "offshore." Also, the index is not constructed totally of frontier markets. Both South Africa and Egypt are typically classified as emerging (see previous post for a discussion of the distinction between emerging and frontier markets). This classification is important given that the emerging markets represent nearly 40% of the index. This actually gives the index both the higher growth and return potential of the higher-risk frontier markets, but also some of the liquidity of slightly less risky investable emerging markets.

The index is market cap weighted and sets maximum holdings at 25% for countries and 8% for any individual companies. Of interest is that Nigeria is already overweight at 32.5% total weight, with 25.2% onshore. It is not clear if the offshore percentages are included in the 25% country limits. Banks currently make up 33.7% of the index, with basic resources at 18.2%, oil and natural gas at 13.5%, telecommunications at 10.2%, and technology at 7.3%. As for components, the fund states that it "..will normally invest at least 80% of its total assets in securities that comprise the Africa Titans 50 Index." Companies must have market capitalizations greater than $200 million. The fund's prospectus also mentions that it may utilize derivatives. The expense ratio for the fund is 1.2%, which can be waived down to a net expense ratio of 0.83%, but is still expensive compared to some of its peers.

While not a pure frontier market ETF (there currently are none), the index does give concentrated exposure to the African region, allowing investors to follow their belief that growth in Africa may be the next big thing. Given capital flows into Africa, and the benefits of higher commodity prices for some of natural resource rich countries in the region, a small exposure to Africa within your portfolio may be worth considering.

IndexUniverse is reporting the offering of a new frontier markets ETF on the Nasdaq: the PowerShares MENA Frontier Countries Portfolio (PMNA). The PMNA will track the Nasdaq OMX Middle East North Africa Index, which includes the countries of Bahrain, Egypt, Jordan, Kuwait, Lebanon, Morocco, Nigeria, Oman, Qatar, and the United Arab Emirates. Claymore recently offered the Claymore/BNY Mellon Frontier Markets ETF (FRN) on the Amex, which is more global given that in also includes countries in Asia, Europe, and Latin America, along with the Middle East and Africa. As a result of its focus, the PMNA is a little more concentrated in oil-rich countries. In a recent post we discussed the new Gulf States index launched by S&P, called the GCC 40, covering 40 stocks from the Gulf Cooperation Council. Of interest is that this index covers some of the same region as as the PMNA, but is focused more on financial companies, and less on crude oil and industrial companies.

The PMNA ETF may be of interest to those investors looking to participate in the growth of the oil-rich gulf states that are themselves in the process of reinvesting capital. Furthermore, some analysts have recently discussed how Africa could be one of the next regions for growth. If this is the case, then Northern Africa would be a good place to start investment in this continent.

Also, for those who are interested, there is a distinction between emerging and frontier markets. The term emerging market was first introduced by the World Bank and is often used to describe a country with an economy that is in the process of rapid industrialization, and one that usually finds itself between developing and developed status. The term frontier market is often used to describe equity markets of smaller and less accessible countries of the developing world, yet still investable. Frontier markets are essentially "pre-emerging" markets that are expected to be classified as emerging markets once capital and liquidity increase. Frontier markets could have a high level of development, but still be too small to be considered emerging (for instance, the Baltic States, such as Estonia and Lithuania). They could also be countries where investment restrictions have started to loosen, allowing companies to be investable (such as countries in the Gulf States), or be countries with lower levels of development than similar regional emerging markets (such as Vietnam and Pakistan). As to be expected, frontier markets in general may offer higher return and longer-term growth, but will also carry more risk.