Egypt ETF Alternatives: Bets For The Adventurous
The U.S. celebrated its independence on Thursday.
Hopefully, Egypt is on a similar path. The North African nation broke free of Mohammed Morsi's "leadership" earlier this week in an effort to sever ties with the controversial Muslim Brotherhood. Morsi is under house arrest and Adly Mansour has been sworn in as interim president following what some international observers are deeming a military coup.
The overthrow of Morsi represents Egypt's second regime change since the Arab Spring over years ago and to say North Africa's largest economy is fractured and home to a still tenuous political situation is an understatement. However, financial markets have embraced that idea that Morsi has been removed from power because the Market Vectors Egypt ETF (NYSE: EGPT) has been surging this week.
EGPT, which had previously reached lows that worse than those seen during the Arab Spring, was reverse split on a 1-for-4 basis on Monday, so the ETF got the benefit of some artificial price inflation. What has happened since then, however, has been legitimate price appreciation as traders have bet the ETF would benefit from regime change.
News of Morsi's potential then realized ouster has been a boon for EGPT, sending the ETF higher on impressive volume. The lone Egypt-specific ETF shot up on Tuesday on roughly six times the average turnover. EGPT even managed to trade quadruple its daily average in Wednesday's holiday shortened session. With more than three hours left in Friday's session, EGPT is up four percent on volume that is already more than six times the usual.
EGPT's post-reverse split price was just over $38. The fund is flirting with $44 Friday, but that does not mean this is suddenly a docile fund that all investors should embrace. Investors looking to participate in upside for Egyptian stocks without making in an all-in bet on the country can consider a pair of multi-country ETFs.
Market Vectors Africa Index ETF (NYSE: AFK)
The Market Vectors Africa Index ETF is another "not for the faint of heart" play and that is not just because of the fund's 22.6 percent weight to Egypt. South Africa, also ravaged by stunningly high unemployment, accounts for 24.3 percent of AFK's weight. AFK's South Africa exposure means investors that buy this fund are, to some extent, leveraged to gold, platinum and palladium prices, tough corners of the market to be in at the moment.
The good news is AFK does offer a 20.2 percent allocation to Nigeria, another frontier market awash in investment potential and peril. AFK has been getting a boost from Egypt as the ETF is up 3.4 percent in the past week.
Investors should know what they are getting into at the sector level as financials, energy and materials names combine for nearly three-quarters of AFK's weight.
PowerShares MENA Frontier Countries Portfolio (NASDAQ: PMNA)
The PowerShares MENA Frontier Countries Portfolio stands as one of the more compelling ETF options for Egypt exposure for a simple reason: Attractive country allocations. Egypt accounts for nearly 18 percent of PMNA's weight, but that is easily trumped by the 24.1 percent weight controlled by far steadier Kuwait.
More importantly, United Arab Emirates and Qatar combine for 31 percent of the ETF's weight. Stocks in those countries have been among the world's best performers this year. Economic advancement and political stability in both nations has finally been rewarded as both recently gained promotions to emerging markets status.
UAE and Qatar's new emerging markets status is expected to mean hundreds of millions, if not billions of dollars in new foreign investment into these countries.
Until recently, Egypt has been a drag on PMNA, but if the country can establish true political stability, the ETF becomes all the more attractive. Still, PMNA is a legitimate play on the UAE and Qatar growth stories, which are just getting going.
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