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A bout of tension is growing in the Middle East as the OPEC top brass Saudi Arabia and other Arab states cut their diplomatic ties with Qatar recently. Qatar has been accused of backing terrorism by Egypt, the United Arab Emirates, Yemen, Libya, Bahrain and Maldives and most importantly Saudi Arabia.

Saudi Arabia alleged Qatar supports militant groups — some backed by the regional opponent Iran — and broadcasting their views and beliefs. Iran, which is at loggerheads with Saudi Arabia and a secret target of the move, held President Trump responsible for creating this situation in his recent Saudi trip (read: Trump Exits Paris Climate Deal: ETFs to Gain & Lose).

As per Reuters, Saudi Arabia, the United Arab Emirates, Egypt and Bahrain stopped transport links with top liquefied natural gas (LNG) and condensate shipper Qatar. Also, Qatar has been barred from the Saudi-led combination fighting in Yemen, as per CNBC.

The news at first benefited Brent crude prices as much as 1.6%, but gradually the market digested its adverse impact. Uncertainty over the stability and successful execution of the ongoing OPEC output deal has cropped up, and hurt oil ETFs United States Oil (USO - Free Report) and Brent crude ETF United States Brent Oil (BNO - Free Report) . On June 5, 2017, USO and BNO lost over 0.6% and 1.1%, respectively (read: Top ETF Stories of May).

Qatar ETF Bleeding

As the move caused the worst tiff in years among some powerful Arab countries, some Middle East ETFs are feeling the pressure. This is especially true for Qatar itself. Abu Dhabi's state-owned Ethihad Airways, Dubai's Emirates Airline and budget carrier Flydubai have said they would hang up all flights to and from Doha from Tuesday morning until further notice, as per an article published on CNBC. Qatar Airways also adjourned all flights to Saudi Arabia.

Investors should note that Qatar ‘hosts a large U.S. military base and is set to host the 2022’ FIFA World Cup. So, if the tension persists, it will leave a negative economic upshot in many areas.

The pure-play Qatar ETF iShares MSCI Qatar Capped (QAT - Free Report) lost about9.1% on June 5, 2017 due to this rift. The 28-stock fund is heavy on the financial sector (53.64%) while industrials (14.5%) and real estate (12.1%) round out the top three spots. The fund has significant company-specific risks as it puts over one-fifth of the weight on Qatar National Bank. In any case, the fund has a Zacks ETF Rank #4 (Sell).

Middle East ETF at Risk

WisdomTree Middle East Dividend Fund (GULF - Free Report) puts about 21.6% weight in Qatar, which is its third-largest country allocation. Industries Qatar (4.36%) and Qatar National Bank SAQ (3.79%) also get places in the top 10 holdings of the fund. United Arab Emirates and Kuwait get 26.9% and 24.8% weight of the fund. Two other countries that are engaged in this dispute – Egypt and Bahrain – also get a total of about 5% exposure in the fund (see all Africa-Middle East Equity ETFs here).

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