Will The Egypt ETF Be Crushed By More Turmoil?

Despite the overthrow of longtime strongman Mubarak in 2011, Egypt remains a deeply troubled country. With the ultimate goal of turning into a democracy, the country is currently ruled by a military council that appears to have no intention of turning over the state to a civilian government anytime soon. This factor has led to sporadic protests across the country, and especially in Cairo, but for the most part, these have been relatively muted compared to what many had seen during the revolution. However, recent events suggest that we could be seeing a new, ugly chapter in Egypt’s history that could push the country back into turmoil.

The latest events stem from a riot after a soccer match in which a deadly riot took place, leaving 74 dead and over 1,000 hurt. Many were enraged by the lack of security, feeling that many government officials allowed this to happen as revenge for some of the events that took place during the revolution. As a result, some took to the streets in countries around the country, leading to more protests—and deaths—in a number of cities across the nation (see Egypt ETF: Further To Fall?).

Given the quick escalation and the underlying issue of the country maintaining a quasi-dictatorship, some fear a return to anarchy in Egypt. With this backdrop, investment in the country looks to remain uncertain once again, especially if the protests remain in the spotlight and the military government escalates the situation further. This could push the country’s markets back into the period that we say in 2011 when investors fled everything Egypt related and instead focused in on safer and more stable emerging markets for exposure. As a good proxy for sentiment on this issue, the Market Vectors Egypt Index ETF (EGPT - ETF report) looks to be an easy way to measure mood on the country.

Egypt ETF In Focus

The Van Eck fund remains the only pure play option that investors have to the country, although products like (PMNA - ETF report), (AFK - ETF report), (FRN - ETF report), or (GULF - ETF report), also offer decent exposure to the nation as well. EGPT follows a rules-based, modified cap weighted index that looks to give investors exposure to firms that are either based in, or do at least 50% of their revenues in the country. Currently, the fund holds 29 securities and charges investors a net expense ratio of 94 basis points (read Africa ETFs: Three Ways To Play).

EGPT is heavily focused on financials as these securities make up about two-fifths of the total assets in the fund, although telecom service companies also make up a good chunk at nearly 20% as well. Beyond these two sectors, double digit weightings are also given to materials and industrials, suggesting that the fund has a decent breakdown among the various sectors. Investors should also note that EGPT has just under 10% of its assets in large cap firms, putting the vast majority of its holdings in pint sized securities, a factor that could increase the overall volatility of the fund (see Three Overlooked Emerging Market ETFs).

Nevertheless, despite the tilt towards volatility, the fund has yet to be impacted by the recent events in the country. EGPT rose by about 3.3% last week and is still up close to 28.3% in the year-to-date period, suggesting that the national economy may finally be starting to get out of its slump. However, investors should note that the fund has certainly tapered off in recent days and another decline is certainly not out of the question. After all, investors shouldn’t forget that EGPT crashed by nearly 53% in 2011 including a 20% drop in the first quarter of the year alone.

Given how little market participants have discounted the situation in Egypt, it appears as though many believe that this issue will just cause sporadic violence and not spiral out of control. While it is true that EGPT has sold off a little in recent days, it barely even registers when compared to the performance of the fund over longer time periods. So for investors concerned about investments in EGPT, a continuation of the status quo appears to be the name of the game, at least for the time being. Just note that as we saw last year—and early in 2012-- perceptions in Egypt can change quickly and that a close monitoring of positions in the country need to take place in order to protect against the significant volatility that can be inherent in this extremely volatile fund (see Three Bond ETFs For A Fixed Income Bear Market).

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