Investing in ETFs tracking markets in oil-rich countries has traditionally been a bet on oil. Higher oil prices-- goes the logic-- will drive gains in non-energy sectors of oil-rich economies. Recent political volatility in the Middle East raises questions about this correlation. For example, starting from the beginning of the revolution in Egypt, the Market Vectors Gulf States ETF (NYSEArca:MES) saw a heavy drop compared to iShares MSCI Canada NYSEArca:EWC) and the United States 12-Month Oil ETF (NYSEArca:USL).
It is not hard to understand the divergence of Canadian and Gulf state holdings. Oil moved higher during this period on political risk. There was little supply disruption during the period covered in the chart. The Suez Canal remained open throughout the crisis in Egypt. Only Libya, which contributes about 2% to the worlds oil supply, saw significant supply disruption. But investors judged that the risk for future supply disruptions increased with political risk in the Middle East. By contrast, Canada's economy will see a benefit of higher oil prices without the negative of political risk. Also, Canada's currency is not negatively impacted by unrest in the Middle East.
It may be easy to explain why returns of some oil rich countries have diverged. It is hard to ignore oil-rich economies that carry political risk. Countries with the largest proven oil reserves are Saudi Arabia, Canada, Iraq, Iran, Kuwait, Venezuela, United Arab Emirates, Russia, Libya and Nigeria, roughly in that order (depending on adjustments for discovery and extraction technologies).
Over 50% of proven oil reserves are in the Middle East. 75% of reserves are in OPEC member countries (The Organization of Petroleum Exporting Countries). According to its website, OPEC represents over 55% of oil traded on the international markets.
For investors who want a piece of the action, single country ETFs or regional ETFs in the Middle East remain good tools even if the financial and other assets held in the ETFs do not always follow the price of crude. Investors should take into account both oil prices and regional political risk when evaluating these ETFs.
A list of key oil-rich countries ETFs and their expense ratios follows: