EQD Research: Saudi Exchange Leading The Way For Derivatives Trading

Feb 12, 2021

By Russell Rhoads,
head of research

Futures based on the MSCI Tadawul 30 Index (MT30) were launched in August 2020 at the Saudi Stock Exchange or Tadawul.  This marked the first listed derivatives to be offered at the exchange and the first listed financial derivative launched in the region.

The MT30 Index is derived from the broader MSCI Saudi Arabia Index and is designed to reflect the performance of the approximately 30 largest and most liquid stocks listed on Tadawul based on free float capitalization. We dug into the MT30 a bit and were surprised to find that it is not dominated by the energy sector, something that would be expected from an index based on stocks in Saudi Arabia.

As of the end of 2020, the MT30 was composed of 42.7% Financial stocks, 25.1% Materials, and 11.4% Communication Services.  Energy is the fourth most heavily weighted sector at 10.9%, however, this does represent the weighting of Saudi Aramco and no other energy stocks.

Economies in the Middle East have been reliant on energy for decades. It is no secret that oil producing countries are diversifying away from relying on a single industry to becoming more diversified economies. This shows up in the industry weightings of the MT30 as well as in the economic progress of several countries in the Middle East.

Another exchange that is planning on following in the Saudi Exchange’s footsteps is the Abu Dhabi Securities Exchange (ADX).  The ADX has indicated plans to double market capitalization over the next three years through a strategy called ‘ADX One’. There are several aspects to the plan, but one thing that stands out to us is the launch of derivatives trading.  ADX already has an ETF available for trading that closely tracks the S&P UAE Domestic Shariah Liquid 35/20 Capped Index and this would be a good candidate for listed derivative instruments.

The Chimera S&P UAE Shariah ETF – Accumulating (CHAESH) is designed to closely track the performance of the S&P UAE Domestic Shariah Liquid 35/20 Capped Index. This fund also reinvests dividends instead of distributing income to shareholders. A quick look at the ETF holdings reflects some similarities to the MSCI Tadawul 30 Index with a smaller than expected weighting in the energy sector.

The largest weighting on the table above is again the financial sector with communication services a distant second.  Energy comprises just under 6% of the index which is another indication that the economic focus for many countries in the Middle East are successfully diversifying themselves away from dependence on energy.

One more exchange that may follow Saudi Arabia’s lead is the Qatar Exchange. Their QE Index is a capitalization weighted index of 20 large cap companies that trade on the Qatar Exchange. There is already an ETF following the QE Index which is appropriately named the QE Index ETF (QETF).

Despite only having 20 stocks in the index, the QE Index is well diversified with representation from  nine different industries. Also, like the other two indices discussed above, is not heavily weighted with energy stocks.

The MSCI Tadawul 30 Index futures contract in Saudi Arabia is the first listed financial derivative offered by an exchange in the Middle East. This is one of many steps the region will take to economically diversify itself away from dependence on energy. As all countries in the region continue to move away from energy dependence, more listed derivative contracts are sure to follow.