Beyond EZA: Alternative South Africa ETF Plays
Broadly speaking, investing in South Africa, an emerging market on a continent chock full of volatile frontier markets, has proven rewarding over the past decade. While not without the usual hiccups experienced by emerging markets ETFs in recent years, the iShares MSCI South Africa Index Fund (NYSE: EZA), the lone South Africa-specific ETF on the market, has gained nearly 250% since its February 2003 debut.
Since then, South Africa has seen its economic stock rise. The resource-rich country is not only by far the largest African economy, it has the distinction of having joined Brazil, Russia, India and China in the BRICS acronym.
Today, South Africa still offers opportunity for investors, but not without a mixed bag feel about the situation. The country is arguably politically volatile and unemployment is almost 24%. On the other hand, Africa's share of global foreign direct investment has been steadily climbing over the past decade with South Africa being the primary destination for foreign inflows.
Regarding ETFs, the P/E ratio for EZA's components is currently 17, indicating the South African equities found in this fund are more richly valued than the holdings of the iShares MSCI Brazil Index Fund (NYSE: EWZ) and the iShares FTSE China 25 Index Fund (NYSE: FXI). EZA's price/book ratio is nearly double that of FXI's.
So it can be said that South African stocks aren't cheap relative to their emerging markets. With that, let's examine ETFs that help investors gain some South Africa exposure without an entire commitment to country as is found with EZA.
First Trust ISE Global Platinum Index Fund (NYSE: PLTM) We profiled the unheralded First Trust ISE Global Platinum Index Fund earlier this year and the ETF proceeded to gain about 10% immediately following that piece. PLTM has slid since early March as investors have dialed back their appetites for risk, but the ETF remains a valid way to get exposure to South Africa.
Not only is South Africa the world's largest platinum-producing country, its the second-largest palladium producer behind Russia. PLTM also offers significant palladium exposure and South Africa represents nearly 30% of the ETF's country weight. If PLTM breaks support at $18, it's time to bail.
EGShares Consumer Services GEMS ETF (NYSE: VGEM) The knock on the EGShares Consumer Services GEMS ETF is obvious: It's thinly-traded, so much so that it doesn't trade everyday. Still, VGEM is up almost 19% year-to-date as emerging markets consumer ETFs have flourished.
In fact, VGEM has dramatically outperformed the EGShares Emerging Markets Consumer ETF (NYSE: ECON), arguably the best of the EM consumer ETF lot in terms of AUM and liquidity. South Africa accounts for 25% of VGEM's weight. South Africa looms large in ECON as well with an allocation north of 17%.
PowerShares S&P Emerging Markets Low Volatility ETF (NYSE: EELV) In the rapidly expanding world of low volatility ETFs investors looking for exposure to South Africa have some options. EELV is probably the best as the new fund allocates almost 20% of its weight to South Africa, more than double the concentration offered by the rival iShares MSCI Emerging Markets Minimum Volatility Index Fund (NYSE: EELV).
Global X Pure Gold Miners ETF (NYSE: GGGG) It's no secret that South Africa is one of the world's largest gold producers and it's no secret that gold mining stocks have struggled mightily compared to gold futures and physically-backed ETFs. Should that trend reverse course, and we're not promising that it will anytime soon, GGGG and its almost 14% weight to South Africa, might be the preferred option.
GGGG, which is just 14 months old, has easily outpaced the larger Market Vectors Gold Miners ETF (NYSE: GDX) this year. Again, that's not saying much.
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