The Middle East Lacks Energy

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After spending over half a century pioneering commodities and other global investments, Van Eck Global has spent the last several years developing exchange-traded products and become the fifth largest ETP provider in the US (and the eighth largest worldwide).  Building off their experience developing USD 25 billion in ETFs, their Market Vectors team discusses their reasoning and outlook on the future of frontier and emerging market opportunities.

Nick Slepko:  While company selection is done through your index methodology, what do you look for when you are determining whether or not to offer a country or commodity ETF?  How does being on the ground in these places inform your thinking?

Van Eck Market Vectors Team:  Essentially, we are looking for a long term compelling investment theme.  When we’re on the ground and visiting sites every couple of years, anecdotal things like more buildings, more public works projects going on, those are clear physical signs of growth and they get you thinking.  If you go to a place like Nigeria and there are no bank branches and everyone does their transactions on their phones, it opens you up to realizing there are trends going on that you might not see if just you’re just looking at financial data in New York.

Slepko:  It is interesting to note that your Coal ETF (NYSEMKT: KOL) and Oil Services ETF (NYSEMKT: OIH) dwarf the USD 43 million your Global Alternative Energy ETF (NYSEMKT: GEX) has been able to attract since it listed in May 2007.  [KOL listed January 2008 and now has a USD 253 million market cap and an average trading volume over 370,000.  OIH began December 2011 and its USD 1.3 billion market cap is complemented by a average trading volume of 3.6 million.]  Is President Obama the only one willing to bet on alternative energy?

Van Eck:  President Obama notwithstanding, at one point Global Alternative was a more than USD 250 million fund.  Much of the decrease in asset size was strictly about underperformance.  Those stocks did not perform well at all.  When oil was pushing well over a hundred dollars, alternative energy stocks were doing well.  It’s both performance and those companies not delivering that impacted the appetite for investing.  Interest certainly waned, and it appears to go where the potential performance in the energy space goes.

Slepko:  What about the wider world?  People seem more willing to put money into Egypt than alternative energy.  Are there reasons you selected the regions for which you’ve listed international ETFs?  Why has your Egypt Index ETF (NYSEMKT: EGPT) attracted five times more interest/assets than the Gulf States Index ETF (NYSEMKT: MES)? Egypt doesn’t seem the most stable play, whereas the Gulf States seem to currently have too much money.

Van Eck:  I think it’s a trading opportunity.  We’ve had more success with focused country ETFs rather than regional ETFs. Egypt didn’t really take off until the Arab Spring in January last year.  It was maybe USD 12 million in assets.  During the uprising it fell some 20%, and shortly thereafter it doubled in assets and continued to grow.  [It’s net assets are currently over USD 50 million.]  I think people wanted to trade that event, and still do to some extent.

Egypt was one of those markets that was large enough and relatively developed (which may be the wrong word to use when talking about a frontier market), that it made sense to offer exposure.  Besides oil and gas, they also had tourism, a fairly well-educated population, and growth looking good with a decent trading volume.

Slepko:  While it is understandable that over 65% of the Gulf States ETF’s holdings are financials (since there are so few publicly traded companies of note in the region), it is surprising that less than 6% of the fund are energy-related stocks – even considering that Saudi Arabian enterprises are not part of the fund.  Do you think lack of oil in the mix is one reason MES hasn’t been as popular as evenEgypt among investors?

Van Eck:  The modest level of assets in MES (and its competitors as well) could be investors lack of certainty in the regions’ geopolitical environment. Some investors have been fearful of a second Arab Spring.

 

 

 


Nick Slepko (hukgon) has no position in any company mentioned here at the time of publication.  The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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