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As equity investments have become more correlated in recent years, many investors have looked beyond traditional locales to those off the beaten path in order to help diversify portfolios. Investors have quickly realized that securities in nations such as those in Western Europe, Japan, and Australia no longer offer adequate correlation benefits. In fact, securities in these nations are often impacted by similar concerns as their American counterparts, forcing many to look to other, less globalized economies for exposure. While investment in markets such as Latin America, Eastern Europe, and Asia have certainly become hot topics thanks to this correlation trend, many investors have likely overlooked Africa as a possible destination for capital.
The continent is still experiencing rapid levels of population growth, has vast natural resources, and is an increasingly important market for mega emerging markets such as China. Yet despite this, the region still is very undeveloped, is relatively uncorrelated to European concerns, and still has immense room to grow in the decades ahead. While much of the continent still has issues in terms of poverty, corruption, and political stability problems, a small allocation from a diversification perspective could be warranted by those seeking to broaden the geographic scope of their holdings. For these investors, we take a closer look at three options for those seeking to make a play on this continent with ETFs:
The largest and one of the most developed economies in Africa belongs to South Africa, a nation with a GDP of a little over half a trillion (in PPP terms) and a population of about 50 million. The country is beginning to finally live up to its potential, ranking as one of the few African nations as ‘Middle Income Country’ by the World Bank and showcased its promise on the world stage last year with the successful hosting of the World Cup last year. Beyond this tourism boost, South Africa remains a leader in important minerals and especially so in gold, diamonds, and platinum. With investor demand for precious metals at a near record high, South Africa has surged as well in recent years to new heights. Unfortunately, the country remains marred by violence and integration is still an ongoing process, especially for the millions who remain unemployed and the large number of people who live on less than $2 a day.
The main way to play the South African economy is with EZA, a popular ETF from iShares. The South African ETF has managed to amass close to $500 million in assets while trading close to 300,000 shares a day. This suggests that there is ample liquidity in the product and that even large investors should be able to find tight bid/ask spreads. In terms of holdings, the fund holds 50 securities with close to 58% going to the top ten holdings. Materials and financials both account for roughly 25% of the portfolio each while consumer discretionary and telecom also make up double digit allocations. Interestingly, the yield on the product is 2.4% in 30 Day SEC terms—high for an emerging market fund—but the returns have been harder to come by. In fact, EZA has fallen by about 23% so far this year including a nearly 8.6% slump in the past quarter alone.
Egypt has once again become a center of news in the region as political infighting and a difficult transition to democracy are preventing the country from achieving its potential. Protests are ongoing in the nation, are often times deadly, and appear to be doing little in terms of shaking the iron grip of the military junta currently ruling the country. However, if Egypt can ever shake this political risk, the country does have a number of promising factors which could make the location an interesting one for investment. A large percentage of the population is still very young and could be reaching its peak earnings potential very soon, suggesting that consumerism could be on the rise. Furthermore, the country’s location straddling the Suez Canal ensures that it is always an important place for global shipping while the tourism industry could stand to benefit from a safer climate as well.
For a play on this North African nation, EGPT is really the only choice available for investors at this time. The fund tracks the Market Vectors Egypt Index which is a rules-based, modified capitalization-weighted, float-adjusted index intended to give investors exposure to Egypt. The fund holds about 31 securities with a heavy focus on mid and small cap firms. In terms of sectors, financials and telecoms dominate, comprising nearly 60% of total assets in the product. While the fund may be heavily concentrated, the choice of sectors also gives it a robust yield as dividend payouts are nearly 5.1% for EGPT.
The fund isn’t nearly as popular as its South African counterpart and the product is one of the more expensive single country ETFs on the market, charging investors 94 basis points a year in fees. It also doesn’t help that the returns in EGPT have been absolutely brutal so far this year as the product has slumped by nearly 40% since the start of the year and has lost about 15.3% in the past three months. However, investors need to remember that the political situation in Egypt is anything but stable, suggesting that huge losses could still impact those in the fund, but that solid gains could also be just around the corner (EGPT: Further To Fall?).
For investors looking to make a more diversified play, AFK could make for an interesting choice. The product from Van Eck seeks to give investors exposure to a host of firms from across the continent, giving access to a number of emerging markets that receive small allocations in most developing market focused funds. Top countries include South Africa (24.8%) and Egypt (17.3%) but large allocations are also given to Nigeria (20%) and Morocco (14.7%) as well. Small allocations are also given to tiny African economies such as Mali and Kenya, but these amount to roughly 5% of total assets.
In terms of performance, AFK has also faced some significant headwinds as the product has fallen by about 27% so far this year. From a shorter time frame, losses are also bad as the product’s inclusion of ultra-risky economies makes a big loser when markets are crumbling (but also a big winner when the risk-on trade hits the markets). In terms of fees, AFK is kind of expensive at 0.78% but this is more than offset by a yield of nearly 1.3%. Furthermore, AFK has a monopoly on the space and is truly the only option that investors have when seeking broad African exposure in their portfolios.
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