This is a thought leadership report issued by the S&P Global Institute.

Structural maturation: The compression of risk 

The Saudi equity market has developed from a high-beta oil proxy toward a more stable core allocation, though the trailing year interrupted that trend. Over the past decade, the S&P Saudi Arabia BMI delivered an annualized return of 9.4%, ahead of the broader S&P Emerging BMI's 8.7%. However, the Saudi benchmark had three- and five-year returns of 1.7% against the three-year return of 18.4% and five-year return of 6.7% for emerging markets.

The shortfall has a specific cause. The S&P Saudi Arabia BMI reached its cycle peak on Feb. 10, 2025, then declined for 330 consecutive days to a trough on Jan. 6, 2026, resulting in a peak-to-trough fall of 13.6% and a 9.1% year-over-year drop in 2025 in US dollar total return terms. This trough preceded the escalation of regional hostilities in late February 2026 by nearly two months and was driven by sustained weakness in petrochemical and materials earnings, not by geopolitical events. It is also what the three- and five-year return figures are measuring. Since the trough, the index has recovered about a third of the total decline, standing 8.9% below its February 2025 peak at the end of August 2026. 

The long-term trend in risk remains downward, with 10-year annualized volatility of 17.1% falling to about 14.5% over the trailing three-year period. This compression reversed over the past year, with rolling 12-month volatility reaching a series low of 8.7% in August 2025, before climbing to 18.6% in August 2026.

Sector divergence: The great rotation

The reshaping of the S&P Saudi Arabia BMI highlights the interplay between Saudi Arabia's old and new economy. Cyclical global headwinds have squeezed the materials sector's index weight to 16.3% from 28.0% since the third quarter of 2021. Because the index is weighted by market capitalization, this drop masks the broader changes. Negative performance in the large, commodity-linked materials sector disproportionately pulls down the headline index, obscuring the expansion of sectors including utilities, information technology, industrials and real estate, which are driven by domestic Vision 2030 spending rather than global trade. The expansion of Saudi Arabia’s digital infrastructure is an example of this diversification, with annual IT capacity expected to average 29% annual growth between 2024 and 2030, according to 451 Research by S&P Global. Collectively, the eight sectors outside materials, energy and financials grew to 36.1% of the index as of August 2026 from 26.6% at the third quarter of 2021.  

The expansion of Saudi Arabia’s presence in international capital markets reflects a significant maturation of its financing landscape over the last decade. Since 2020, the financials sector has maintained its dominance and acted as a stabilizer with a third-quarter 2026 weighting of 37.8%. The 10 largest listed Saudi banks reported an aggregate net profit of 24.87 billion riyals in the second quarter of 2026, up 12.5% year over year, with net interest margins of 2.96%, according to Al Rajhi Capital.

Saudi government and government-related entities remain pivotal to banking sector liquidity, with public sector deposits rising to 33% of total system deposits as of June 2026, from nearly 20% of total deposits at the end of 2018. However, these inflows are insufficient to fund expanded loan books, necessitating the mobilization of external funding and exploration of solutions involving structured finance.  

The profitability of Saudi banks is driven by systemic credit growth and wide net interest margins, and is structurally supported by the country's high concentration of sharia-compliant non-interest-bearing deposits. Notably, the representation of the financials sector remains significantly higher in Saudi sharia-compliant benchmarks compared with some regional peers.

Sharia structural integration

The maturation of the Saudi market is deeply tied to sharia principles, and nowhere is that clearer than in the composition of the investable universe. The S&P Saudi Arabia BMI Shariah, the sharia-compliant version of the S&P Saudi Arabia BMI, covers 91.9% of constituents and 81.6% of the broader S&P Saudi Arabia BMI's total market capitalization, the highest overlap of any market in the Gulf Cooperation Council. This makes sharia compliance the standard for broad market exposure rather than a screen applied to it. Additionally, Saudi Arabia is developing sharia-compliant structured finance solutions and overhauling its securitization framework. These advancements could further broaden domestic and international capital market financing solutions across various industries.

By aligning Islamic and non-Islamic capital, Saudi Arabia has created a substantial engine for capital formation. In 2025, the country accounted for 79% of regional IPO proceeds, raising $4.1 billion across 13 listings on the Saudi Exchange’s main market and 23 listings on parallel market Nomu, outpacing the UAE's $544 million and Kuwait's $180 million.

The Saudi model's efficacy is supported by its uplisting pipeline, which transitions high-growth assets into institutional-grade securities. Since the 2017 inception of Nomu, 21 companies have migrated to the main market by meeting stricter governance standards. Nomu acts as a training ground that builds critical market depth. In 2025 alone, five companies including Canadian Medical Center, Gas Arabian Services and Obeikan Glass transitioned following the high-profile graduations of Jahez International and Shatirah House Restaurant in 2024. These migrations indicate that Saudi Arabia systematically replenishes its senior board with experienced issuers, expanding quality and volume.

Institutional liberalization and policy pivot 

On Feb. 1, 2026, the Capital Market Authority abolished the Qualified Foreign Investor framework, transitioning to the FIS regime. This move prioritizes direct ownership over synthetic swaps, better aligning Saudi Arabia with developed market standards. The 49% aggregate and 10% single-investor ownership limits were retained.

By making its equity market more accessible, Saudi Arabia set the stage for increased inflows, and the reform was tested within weeks of taking effect. Foreign ownership stood at 4.74% of total market capitalization in late December 2025 and 4.63% at the end of July 2026, broadly stable across both the framework transition and the market's trough.

SPIVA MENA Year-End 2025: What the results say about Saudi Arabia

The SPIVA MENA Scorecard measures the performance of actively managed Middle East and North Africa equity funds against their respective benchmarks over various time horizons. By tracking data on outperformance rates, survivorship rates and fund performance dispersion, the scorecard provides a view of structural evolution by measuring active fund performance against benchmarks such as the S&P Saudi Arabia.

Data reveals that Saudi Arabia is a maturing market that is becoming more institutionally investable and increasingly difficult to outperform.

The full-year 2025 results reverse a midyear picture that had looked considerably more favorable to active managers. Through the first half of 2025, about 39% of Saudi-focused active funds had underperformed the benchmark. Across full year 2025, 67% underperformed. The swing was driven by the second half, when the share of index constituents beating the benchmark fell to 26% from 35%. Short-horizon active results proved unstable enough to invert within six months.

As time horizons extend, the influence of the benchmark strengthens. Underperformance was 43.5% over three years, 17.6% over five years and 61.9% over 10 years, with 57.1% of funds trailing on a risk-adjusted basis over the decade.

The survivorship rate of Saudi Arabia’s equity funds remains the most compelling sign of market stability. With a survivorship rate of 81.0% over a 10-year horizon, the country's equity fund ecosystem is the most durable of the region, ahead of 71% for the Gulf Cooperation Council and nearly double the 44% rate for Middle East and North Africa. This indicates a comparatively stable and professionalized domestic asset management landscape that is advancing into a sophisticated institutional environment where passive investment strategies are increasingly viable.

Saudi Arabia has broadened beyond commodity-driven volatility, prioritizing diversification, depth and openness. The transition to the FIS regime widens market access, while the changing composition of the country's investable universe continues to reduce long-run risk.

The market's weight in the S&P Emerging BMI stands at 2.86%, down from a peak of 4.65% in September 2022. This decline follows directly from relative underperformance and is a reminder that index significance is earned continuously. Saudi Arabia is no longer just a regional play. It is a structurally significant component of emerging market equities whose returns remain tied to a concentrated sector base. Data on active versus passive performance indicates a broader, efficiently indexed market where indexation is the sensible default, and where rotations as sharp as those in 2025 will periodically reward selection.