Saudis ramp up efforts to tap ETF investors to support Vision 2030

The Saudi Arabian sovereign wealth fund’s investment in a recently launched exchange traded fund underlines the kingdom’s growing interest in using the mass-market fund structure to develop its capital markets.

The Saudi Public Investment Fund has stumped up $200mn as a seed investor in State Street Global Advisors’ Europe-listed SPDR JPMorgan Saudi Arabia Aggregate Bond Ucits ETF, which launched in December.

The ETF provides exposure to US dollar-denominated Saudi sovereign and quasi-sovereign bonds with an average maturity of about 10 years. It is believed to be the first Saudi bond ETF to be listed in Europe or the US.

According to its latest strategy report, the PIF’s mandate is to act as an “economic catalyst” for Saudi Arabia at a time when the kingdom aims to diversify the economy away from oil and to develop its capital markets with the ambitious Vision 2030 development programme.

While a bond fund is a new proposition for overseas investors, US and European investors have had access to Saudi equity ETFs for years. The $634mn iShares MSCI Saudi Arabia ETF launched in 2015 and the $18mn Franklin FTSE Saudi Arabia Fund followed in 2018.

Each fund has a European version: the $414mn iShares MSCI Saudi Arabia Capped Ucits ETF, launched in 2019, and the $1.3mn Franklin FTSE Saudi Arabia Ucits, unveiled in October 2024.

But perhaps inspired by the rapid growth of the $15tn global ETF industry, Saudi Arabia has recently ramped up efforts to encourage investors in China and Japan to pump money into its stock market via ETFs.

The PIF was a cornerstone investor in Mizuho Financial Group’s One ETF FTSE Saudi Arabia Index fund, injecting $100mn into the vehicle that listed on the Tokyo stock exchange on December 12.

The PIF was also a seed investor for the first Saudi Arabia ETF in the Asia-Pacific region — the CSOP Saudi Arabia ETF, which launched in Hong Kong in November 2023.

Two China-listed exchange traded funds tracking Saudi equities, which launched in July last year, are feeder ETFs for the Hong Kong vehicle.

Saudi Arabia has also included ETFs in it efforts to increase its outward portfolio investment. A Saudi-listed ETF tracking Hong Kong-listed companies debuted in October last year.

Emmanuel Laurina, head of Middle East, Africa and official institutions at SSGA, said its Saudi bond fund was aimed at “institutional, intermediary and retail investors” who wanted to take a “medium or long-term exposure” to the performance of US dollar-denominated sovereign or quasi sovereign bonds.

He said the decision to list in Europe — via the London Stock Exchange and Xetra in Frankfurt — had been driven by client demand.

SSGA said the ETF would serve global investors looking to gain access to the local bond market, which was “continuing to mature” due to the huge infrastructure needs of Saudi Arabia’s Vision 2030.

It carries a total expense ratio of 0.37 per cent, rendering it cheaper than the iShares and Franklin equity ETF vehicles that are priced at between 0.39 per cent and 0.75 per cent. The fund will not only allow easier access to local bonds than buying them directly, but also offer diversification across issuers and yield curves, Laurina said.

An HSBC report looking at Saudi Arabia’s international trade outlook published in October last year notes a number of positives including that Saudi Arabia’s non-oil activities contributed more than 50 per cent to GDP for the first time in modern times in 2023, indicating success in diversifying the economy beyond oil.

However, with foreign direct investment lagging behind Saudi aspirations, the kingdom had to scale back some of its aspirations.

Kenneth Lamont, principal at Morningstar, said PIF’s injections of seed capital would elevate the ETF above most fund selectors’ minimum size criteria.

“More than anything this is a move designed to boost credibility and attract interest,” he said.

But, in reference to the SSGA launch, he added that the ETF would only be successful if the investment rationale for Saudi debt was compelling enough.

In contrast to Japan’s decision to support its equity market by buying ETFs, he said Saudi Arabia was using ETFs as part of its longer-term strategic goal of developing its financial markets and diversifying its economy away from oil.

However, he added that such lofty ambitions did not always end on a positive note. The KMEFIC FTSE Kuwait Equity ETF, which launched in Europe via white-label platform HANetf in 2019 to attract foreign investment as the Gulf state made efforts to diversify its economy, closed less than two years later after failing to attract sufficient investment.

“PIF continues to create opportunities, open gateways and enable access to Saudi Arabia’s diverse and dynamic capital market,” said Yazeed Al-Humied, deputy governor and head of Mena investments at PIF.

“PIF’s investment into the new Saudi ETF further deepens the Saudi market, while attracting investors from across Europe and strengthening cross-geography partnerships, increasing international investment in Saudi Arabia,” he added.