Hot on the heels of the success of Invesco’s Saudi Arabia ETF, HANetf last month launched the Kuwait & Middle East Financial Investment Company (KMEFIC), an ETF covering the Kuwaiti stock market. The ETF offers exposure to 13 Kuwaiti companies with a combined market cap of $14.6bn. It has listed on the London Stock Exchange, Borsa Italiana and Xetra exchanges and comes with a total expense ratio (TER) of 0.80%.
Adel Fahed Al Humaidhi, chief executive of KMEFIC, said the aim of the fund was to “break down barriers to investments in Kuwait’s equity markets.”
“We hope that this product will be the first of many that will allow foreign investors to participate in Kuwait’s vibrant emerging economy.”
Following the launch, we asked the Product Panel to take a look at the constituents of the ETF and judge what its appeal might be to investors looking to gain exposure to a single country emerging market fund.
Kenneth Lamont, Morningstar
Single country emerging market funds are a fine example of the democratising benefits brought by ETFs. Retail investors can now access markets which were previously off limits to them. This Kuwait-focused ETF is most suitable for a niche group of informed investors wishing to make granular tactical plays. Investors should be warned that this granularity comes at a cost in the form of an elevated risk profile. The ETF is physically replicated which may please some investors but means the less liquid part of the underlying market cannot be included. As such, it holds just 13 stocks, making it one of the very narrowest ETF exposures available.
While a 15% issuer cap has been introduced to address stock concentration, 60% of fund assets are still invested in just four stocks, namely Agility Public Warehousing Company, Kuwait Finance House, Mobile Telecommunications Company and the National Bank of Kuwait. We see concentration on a sector level too, with over 50% of assets invested in financials. Not only should investors in this ETF fully understand the drivers of the Kuwaiti economy and the reforms currently being undertaken but also be comfortable with investing in an emerging market, which is likely to involve heightened regulatory, political and liquidity risks. The fund is currently the only Kuwait ETF on the market, but it is not the first. Comparable offerings from BNP and Lyxor have come and gone over recent years. With a TER of 0.80%, the fund sits towards the high end of the range of single country emerging market ETFs.
Ben Seager-Scott, Tilney
The KMEFIC FTSE Kuwait Equity UCITS ETF is the latest launch using HANetf’s white-labelling platform, which has enabled the Kuwait & Middle East Financial Investment Company to sponsor this ETF which is the first to focus on Kuwait, demonstrating how the platform approach could enable a raft of new entrants into the European ETF space. Recent market reforms in Kuwait (and Saudi Arabia, for that matter) have seen the country finally added to the emerging market classification, which in turn makes investment by international investors more viable and is likely to result in much greater investor interest than has been the case before.
Until now, it has been relatively difficult for most investors to gain significant access to Kuwait; despite inclusion, the country’s weight in the usual emerging market indices has been negligible, so this launch will be of interest to those looking to express a view on this Gulf country, which is likely to be those more adventurous investors who already have an interest in the ‘next generation’ emerging and frontier markets. The flip side, of course, is that this will probably be a little niche for most mainstream investors. While the index has relatively little exposure to oil and gas, it is dominated by financial stocks, which can be very volatile, and the index has only 13 companies in a market which will have relatively limited liquidity. The cost, at 0.80%, is considerably higher than for an index tracking broad regional exposure, but that is to be expected in this specialist exposure – I cannot see the price war coming to this part of the market any time soon. Nevertheless, this is likely to be a useful tool in the toolbox for some investors.