Saudi Arabia's diversification efforts, opportunities spark kingdom-focused ETFs

There’s a new set of exchange-traded funds hitting the market, with a slew of global money managers launching Saudi Arabia-focused strategies amid the kingdom’s admission to major indexes and efforts to diversify its economy.

Just last month, the $4.73 trillion State Street Global Advisors — $1.52 trillion of which is ETFs assets under management — launched its SPDR J.P. Morgan Saudi Arabia Aggregate Bond UCITS ETF, the first Saudi Arabia fixed-income undertaking for collective investment in transferable securities ETF in Europe, the firm said. The ETF tracks the new J.P. Morgan Saudi Arabia Aggregate index, and counts the sovereign wealth fund Public Investment Fund, Riyadh, with about $925 billion in assets, among its investors.

Sources cited both the investment destination and the ETF wrapper as reasons for the trend of launches. Data from research and consultancy firm ETFGI showed $2.9 billion in assets across 16 ETFs listed in Europe, the U.S., Asia-Pacific and the Middle East.

SSGA’s CEO and President Yie-Hsin Hung said at an event to mark PIF’s $200 million investment that Saudi Arabia “is a market that we expect is going to be growing at twice the pace of the developed economies around the world.”

'Significant potential'

Deborah Fuhr, managing partner, founder and owner of ETFGI, also said that “Saudi Arabia is one of the fastest-growing markets globally, with significant potential for both equity and fixed-income investments.”

The kingdom’s stock market stood at a market capitalization of $2.69 trillion, according to figures published on Nov. 15 by Statista Research Department. The next largest, the United Arab Emirates’ stock market capitalization, was $980 billion.

“As the largest economy in the Middle East and a key player in the global energy market, Saudi Arabia holds strategic importance for investors looking to diversify their portfolios,” Fuhr added.

The kingdom was added to the MSCI Emerging Markets index in 2019, and as of end-2024 accounted for 4.16% of the index — the fifth-largest of the 24 country constituents, and behind China, Taiwan, India and South Korea.

“Saudi Arabian equities have grown in prominence in the investable emerging markets equity universe, backed by fundamental economic reforms,” said Caroline Baron, head of Europe, Middle East and Africa ETF distribution at Franklin Templeton.

Changes under Saudi Arabia's Vision 2030 initiative to diversify the economy away from dependency on oil include improving regulations and the business environment, according to the International Monetary Fund.

The kingdom’s equities “may offer both an interesting growth opportunity and potential diversification to an emerging markets allocation," Baron said. "Saudi Arabia is becoming one of the core single country exposures within emerging markets.”

Saudi Arabia was the fourth-largest country constituent of the FTSE Emerging index as of Dec. 31, at 4.59% and behind only China (30.8%), India (22.15%), and Taiwan (20.31%). South Korea is classified as a developed market by FTSE Russell.

“The dramatic increase in its weight in EM is a key reason why investors need to look at Saudi,” Baron added. The kingdom was added in March 2019, and recently pushed Brazil into fifth place in terms of country weighting.

Franklin Templeton launched its Franklin FTSE Saudi Arabia UCITS ETF at the end of last year. Sources also highlighted the diversification the kingdom brings to investors in terms of sectors. Franklin Templeton has a total $1.5 trillion in assets under management.

The Saudi Arabian market's "high weighting to financials and materials (offer) exposure to major companies in the region and low weighting to sectors such as IT and communication services,” which Baron said are overweights in most major benchmarks.

The $1.85 trillion firm Invesco — $484 billion of which is assets under management in ETFs and index strategies as of Dec. 31 — launched a Saudi Arabia UCITS ETF in 2018 “in anticipation of (the kingdom) joining the MSCI EM index,” said Christopher Mellor, head of EMEA ETF equity product management. The firm also launched a Kuwait-focused product around the same time, “as a way for investors to…vary their exposure to what is now part of their emerging markets universe. It’s purely an access product,” he said.

A Saudi Arabia-focused exposure also gives geographical diversification, Mellor added. “I think investors are taking more of a country-by-country approach to emerging markets, partly caused by the scale of China and disappointing performance of China the last few years.”

More investors are looking at specific China exposures paired with an emerging markets ex-China exposure, or emerging markets ex-China and India. “If you’re starting to go down that route, maybe you’re taking a view on the top five countries — and Saudi Arabia is on that list,” Mellor said.

The second reason for the flurry of Saudi-focused ETF launches is the appeal of the investment vehicle itself. While Saudi Arabia has opened and improved in terms of access and financial markets infrastructure, it remains a tough trading nut to crack due to various requirements, sources said.

ETFs make “investing very easy — one trade, one settlement on your local exchange in your currency, instant diversification in one trade,” and no need for special accounts, Fuhr said.

ETFs offer “a simple, flexible, quick way to get access to a specific area and this exposure with Saudi Arabia is no exception,” Franklin Templeton’s Baron agreed. “Setting up Saudi equity custody, even for institutional investors, can take time and be costly and so the ETF can help alleviate those issues whilst offering full transparency.”

Invesco’s Mellor said expense and complications may hold back investors from trading directly on the Saudi Arabia stock exchange — the Tadawul Stock Exchange — and choose an ETF instead. While Saudi Arabia’s ascension to emerging markets indexes from frontier markets reflected an easing of requirements, “it’s easier, but by no means easy,” he said.

Investing directly “can be expensive and complicated to do, very often unless you have a very clear view on a particular stock, taking an active position on a stock within a certain market isn’t what (an investor is) looking to do,” Mellor added.

The spotlight is also shining on Saudi Arabia because of sports and the kingdom’s winning bid to host the FIFA World Cup in 2034. Fifteen stadiums in five host cities — Riyadh, Jeddah, Khobar, Abha and Neom — will house thousands of soccer fans and 48 teams.

“This will be the first time the tournament is held in Saudi Arabia and the second time in the Middle East,” following Qatar’s hosting in 2022,” ETFGI’s Fuhr said.

The kingdom is also “pulling in superstar athletes like Ronaldo, Neymar, and Benzema” for its local soccer teams, said Rony Abboud, chief marketing officer at Trackinsight, a Pensions & Investments partner that provides a global ETF selection and analysis platform.

“They’re also playing it smart globally, staying neutral in big conflicts and keeping good relations with both the East and the West. All of this makes Saudi a hot spot for investors, and it’s no surprise fund issuers are jumping in to meet the demand,” he said.