ETFs for Oil-Rich Countries

Higher oil prices over the past few years have meant big gains for oil-infrastructure ETFs. What about ETFs covering oil-rich countries?

Countries with the largest proven oil reserves are Saudi Arabia, Canada, Iran, Iraq, Kuwait, United Arab Emirates, Venezuela, Russia, Libya and Nigeria, in that order. Of these ten, only Canada and Russia currently have their own focused ETF product. Some of these countries, like Libya, Iraq, and Iran, are very difficult for U.S. investors to access. Several regionally focused ETFs provide exposure to equities in Kuwait, the UAE, and Nigeria.

ETFs covering oil-rich countries and their expense ratios are listed below:

• iShares MSCI Canada (AMEX:EWC), 0.52%
• Market Vectors Russia ETF (NYSEArca:RSX), 0.62%
• Market Vectors Gulf States ETF (NYSEArca:MES), 1.0%
• WisdomTree Middle East Dividend (NasdaqGM:GULF), 0.88%
• PowerShares MENA Frontier Countries (NasdaqGM:PMNA), 0.95%
• Market Vectors Africa (NYSEArca:AFK), 0.88%

The above ETFs are quite different in their structure and intent, but they are alike in the sense that the majority of their holdings are outside the oil sector. The Canadian ETF EWC, for example, is structured to reflect the Canadian market as a whole. So only about 25% of EWC's holdings are in the energy sector. Financial assets make up almost a third of the fund, with Royal Bank of Canada (NYSE:RY) and Toronto Dominion Bank (NYSE:TD) as its two largest holdings. About a quarter of EWC is in the industrial materials sector.

In the case of Russia's RSX, there is more exposure to energy. Energy and energy-related equities currently compose about a third of the fund. Like EWC, RSX is also heavily invested in industrial materials and telecommunications. Financials account for less than 10% of RSX. Russia's fortunes have always depended on oil and other raw materials to a greater extent than even Canada.

The chart below compares the RSX and the EWC with an ETF that attempts to tracks the price of oil, United States 12-Month Oil (NYSE:USL).

As the above chart indicates, the Russian ETF in particular has a shape similar to the ETF tracking oil. The Canadian ETF EWC is also well correlated but less volatile.

For exposure to oil-rich countries in the Middle East, the Market Vectors Gulf States MES can be a good choice. Approximately 60% of the fund's holdings are Kuwaiti. 20% are equities in the UAE, 15% are Qatar (which is not in the top ten countries as measured by total reserves, but it is on par with Saudi Arabia for oil wealth in terms of size and population) and the remaining 5% are Oman and Bahrain. But because the oil sector is nationalized, a tiny 3% of MES is devoted to energy sector related assets. At over 65% of the fund, the financial sector dominates. Telecommunications and business services make up most of the rest of the fund's holdings.

The situation with WisdomTree's fund GULF is similar. Financials make up about 50% of the fund, with 30% going to telecommunications, 10% to industrial materials. Only 1% is invested in the energy sector. Compared to MES, GULF has more exposure to countries without significant oil reserves. Egypt makes up 15% of the fund. Morocco 10%. Jordan and Oman another 10%. GULF does have 15% exposure to Kuwait, 15% to the UAE, and 15% to Qatar. Oman and Bahrain have smaller allocations.

Powershares' Frontier country product is another possibility. It has good exposure to Kuwait and the UAE. Both represent about 20% of the fund. Egypt, Jordan, Morocco and Oman make up the other 60%. Like GULF, about 50% of overall assets are allocated to the financial sector. As for the rest, telecommunications make up another 20%, 30% is in industrials and materials, and energy assets amount to less than 1%. MES, GULF and PMNA are all less than a year old and it is difficult to get a sense yet of whether or not they will trade more closely with oil or financial sector ETFs like the SPDR Select Financials (AMEX:XLF).

Market Vectors' Africa fund AFK has about 25% exposure to Nigeria, the most important country in Africa in terms of oil assets. South Africa also gets 25% of the fund. Morocco and Egypt together are about 30% of the fund. The remainder is devoted to smaller African countries, including Equatorial Guinea, Mali and Zambia. AFK has some exposure to the energy sector, though mostly not by holding Nigerian assets. At just under 10% of the fund, South Africa's Tullow Oil (NasdaqGM:TLW) is its single largest holding. Overall, oil and gas make up about 15% of the fund.

ETFs like United States Oil (USL) provide access to oil through the ownership of futures contracts. ETFs like the Energy Select Sector SPDR (XLE) provide exposure to major oil companies. Another less direct way for an investor to participate in demand for oil is to invest in ETFs with holdings in oil-rich countries.