Analyzing the Impact of Saudi Exposure in Key Indices

Two major index providers plan to add Saudi Arabian stocks to their indices this year, and Vanguard will add exposure to Saudi Arabia to some of its mutual funds. There will be relatively little immediate impact, but in this post we highlight some of the characteristics of the Saudi market to help institutional investors better understand the implications of the changes.

(Estimated reading time: 2 min 15 sec)

FTSE Russell plans to add Saudi Arabia to the FTSE Global Equity Index Series in a phased timeline, beginning March 2019. Additionally, the MSCI Saudi Arabia Index will be included in the MSCI Emerging Markets Index, the MSCI ACWI Index, and other global and regional indices.

In response to FTSE’s decision, and promotion of Saudi Arabia to “secondary emerging market” status, several Vanguard index funds will include shares of Saudi stocks in their portfolio holdings. The Vanguard Total International Stock fund (Admiral Shares: VTIAX; ETF: VXUS) and the Vanguard Emerging Markets Stock fund (Admiral Shares: VEMAX; Investor Shares: VEIEX; ETF: VWO) are both expected to increase exposure to Saudi Arabia by 0.7% and 2.9%, respectively.

Since these changes will be relatively small, we expect to see less meaningful impact in the coming year. After inclusion implementation in 2019, Saudi Arabia will represent 2.6% of the MSCI Emerging Markets Index and 2.7% of the FTSE Emerging Index.

However, investors should be mindful of the following attributes of this market:

  • The Saudi stock market is big. Saudi Arabia is one of the largest emerging market economies, with more than $680 billion in nominal GDP as of Dec. 31, 2017, according to the CIA's World Factbook. Countries that shift into the emerging market index are typically small. Saudi Arabia is a more mature market, roughly the size of Mexico or Malaysia, and will be one of the top 10 emerging market countries.
  • The Saudi equity market is heavily concentrated in Financials and Basic Materials stocks—but not oil. Saudi Arabia is the world's largest oil exporter, but the Energy sector is only roughly 1% of the FTSE Saudi Arabia Inclusion Index because much of the industry is owned by the state. Financials and Basic Materials account for more than 70% of the index, as the Saudi government has focused on economic development outside the energy sector.