The Definitive Africa ETF Guide
In the eyes of many, Africa is the world's last investment frontier. Prized for its abundant natural resources, oil chief among them, Africa offers cautionary tales as well. The world's second-largest continent by area and population, is known for, among other things, corrupt, unstable governments, violence, poor human rights records and stunning levels of poverty and unemployment.
When it comes to ETFs, Africa isn't short of options, but on the other hand, some of the continent's largest countries are not yet represented in the exchange-traded products universe. In 2011, Global X and Van Eck, the parent company of Market Vectors, filed plans for Nigeria-specific ETFs, but those funds have yet to come to market. Van Eck also filed plans for the Market Vectors Nigeria-Focused Western Africa ETF, another fund that has yet to debut.
While investors wait for the number of ETFs offering exposure to increase, the existing funds deserve evaluation for those looking to get exposure to the continent that is known as the cradle of civilization. With that, here's Benzinga's definitive Africa ETF Guide.
iShares MSCI South Africa Index Fund (NYSE: EZA) If nothing else, South Africa is the African nation and economy that Western investors are most familiar with, so it's no surprise that the iShares MSCI South Africa Index Fund has been able to stay afloat for over nine years. Actually, it's one of the most successful Africa ETFs with almost $459 million in assets under management.
Home to 50 stocks, EZA's top sector weight is financials, not materials as some might guess. Don't worry, materials are next at 21.3% of the fund's weight. It should also be noted that several years ago, South Africa joined an elite club by becoming the "S" in the BRICS acronym.
That's not helping things much these days. We recently rated South Africa as the second-worst of the BRICS for the back half of 2012. The three major ratings agencies have pared their outlooks on South African debt in recent months. Earlier this month, Moody's Investors Service said South Africa's struggle with unemployment and cutting public spending is making public policy more unpredictable there.
Unemployment must be acknowledged with regards to EZA and South Africa. The country is home to a nasty 25% unemployment rate which could make even Spain blush and economic growth this year isn't expected to be enough to significantly alter the outlook for the better.
Market Vectors Egypt ETF (NYSE: EGPT) The Market Vectors Egypt ETF is the other country-specific fund among Africa ETFs and as many Westerners already know, Egypt is no peach when it comes to political stability. The country confirmed today that Ahmed Shafik, Hosni Mubarak's last prime minister, will square off against Muslim Brotherhood candidate Mohamed Morsi in the June 16 election that will determine Egypt's first democratically elected president.
To its credit and despite its status as a frontier market fund, EGPT has held up remarkably well in recent weeks relative to larger emerging markets ETFs.
Egypt is one of North Africa's largest, more diverse economies, but an exodus of foreign capital since the Arab Spring and dwindling currency reserves could easily pressure an already fragile economy further.
Yes, EGPT has held up nicely, but it can be said it's only a matter of time before Egypt's glum economic outlook catches up with this ETF. A move below support at $12 would be an obvious sell signal.
Market Vectors Africa Index ETF (NYSE: AFK) As we've previously noted about AFK this $78.3 million ETF, allocates just over a quarter of its weight to developed market countries that do business in Africa, reducing some of the fund's exposure to the whims of local African markets.
Some not all because South Africa accounts for almost another quarter of the fund's weight and Egypt and Nigeria each garner allocations in excess of 18%. Morocco home to a tepid investment thesis for the moment represents 12% of AFK's weight. Financials account for almost 41% of AFK's weight while materials and energy combine for another 31%.
Despite tumbling oil prices and the rejection of the commodities trade recently, AFK is another example of an Africa ETF that has held up relatively well. Up more than 8% year-to-date, AFK currently yields north of 3% and that's better than one will do with the S&P 500.
WisdomTree Middle East Dividend ETF (Nasdaq: GULF) The WisdomTree Middle East Dividend ETF is typical of many multi-country ETFs offering exposure to Africa and the Middle East in that financials and telecoms dominate the sector weights. In this case we're talking about almost 75% of GULF's weight. GULF, with a distribution yield of almost 4.4%, makes the list because of its nearly 10% allocation to Morocco.
Guggenheim Frontier Markets ETF (NYSE: FRN) The Guggenheim Frontier Markets ETF is an interesting way for investors to just nibble on the Africa investment thesis without jumping in to what can be scary waters. Egypt and Nigeria combine for about 13% of FRN's weight, but this is really a Latin America ETF as Chile, Colombia, Argentina and Peru combine for over 71% of FRN's weight.
PowerShares MENA Frontier Countries ETF (Nasdaq: PMNA) The PowerShares MENA Frontier Countries ETF is another multi-continent play that includes some exposure to North Africa. That means a combine 29% allocation to Egypt and Morocco. Thinly traded, PMNA is up almost 6% year-to-date, but be advised 69% of this ETF's sector weight goes to financial services names.
SPDR Emerging Middle East & Africa ETF (NYSE: GAF) The SPDR Emerging Middle East & Africa ETF has been around for over five years, but like many of its Africa ETF counterparts has flown under the radar. In defense of the $84.7 million fund, GAF has a lower expense ratio, lower P/E ration and higher dividend yield than the iShares MSCI Emerging Markets Index Fund (NYSE: EEM). The downside: This ETF isn't as diverse as its name implies as South Africa accounts for almost 90% of the country weight.
iShares MSCI Emerging Markets EMEA Index Fund (Nasdaq: EEME) The iShares MSCI Emerging Markets EMEA Index Fund debuted in mid-January and its merits as an Africa play come by virtue of a 44.5% weight to South Africa, the fund's largest country allocation, and a 2.6% weight to Egypt. Overall, EEME's various country weights are not conducive to the current market environment. Translation: Many of the ETFs tracking the individual countries represented in EEME are close to their 52-week lows.
Other funds to consider: The First Trust Emerging Markets AlphaDEX Fund (NYSE: FEM) with a 12.4% weight to South Africa, the EGShares Low Volatility Emerging Markets Dividend ETF (NYSE: HILO) with a 14.7% weight to South Africa and the EGShares Industrials GEMS ETF (NYSE: IGEM) with an 8.4% allocation to South Africa.
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