Africa ETF: Ready To Surge?

by on March 9, 2010 | ETFs Mentioned:

In recent months a great deal has been written regarding the wildly different recoveries underway in the world’s developed and emerging economies. With the U.S. economy held in check by still mounting job losses and western Europe has facing a potential debt crisis, the world’s developing economies have emerged as the primary drivers of global growth. Much of the attention has focused on the BRIC bloc of countries, but the relative success of emerging and frontier economies goes far beyond Brazil and China.

African economies are also showing signs of strength, and the managing director of the International Monetary Fund recently noted that the continent’s economic prospects have improved considerably. “African economies are recovering faster than expected,” said Dominique Strauss-Kahn during a recent trip that included visits to Zambia and South Africa. “Certainly some Asian countries are leading the move, but African economies are recovering at the same speed, sometimes faster than many others.”

The IMF noted estimated that sub-Saharan Africa experienced growth of 2% in 2009, higher than the 1% originally expected. Strauss-Kahn also said he expects growth for sub-Saharan Africa of 4.5% this year, up 50 basis points from previous estimates. According to the IMF, the improved outlook is due largely to strong performances in South Africa and Nigeria, two of Africa’s largest (and most mineral-intensive) economies. On his trip, Strauss-Kahn praised several of the fiscal policies implemented by African governments ahead of the recession, noting that they helped the continent’s economies avoid the problems that have plagued the U.S. and Europe.

Africa ETFs: Off To A Strong Start

While African equities are included in many emerging and frontier markets ETFs, the allocations made by these funds are often minor. There are a couple of ETFs, however, that focus exclusively on African stocks. The Market Vectors Africa Index ETF (AFK) is designed to replicate the performance of the Dow Jones Africa Titans 50 Index, a benchmark consisting of publicly-traded companies headquartered in Africa or that generate a significant portion of revenues in Africa. Somewhat surprisingly, banks receive the largest sector allocation in the fund at about 29%, followed by basic resources (19%) and telecommunications (12%). Oil and gas companies account for only about 11% of AFK’s holdings.

By country, AFK is heaviest in South African equities (about 30% of holdings), with Nigeria and Egypt also receiving significant weights. AFK is already up more than 5% so far this year, making it one of the top performing international equity ETFs year to date (read more about the Africa ETF here).

AFK

For investors looking to target specific African economies, there are two primary ETF options:

  • iShares MSCI South Africa Index Fund (EZA): This ETF invests in stocks listed in South Africa, one of the world’s largest emerging markets beyond the BRIC bloc of countries. EZA is heavy in both financial firms and materials companies, as South Africa’s economy relies heavily on the country’s abundance of certain valuable resources.
  • Market Vectors Egypt ETF (EGPT): This ETF, which was launched about a month ago, offers exposure to Egyptian stock markets, and gives significant weightings to financials and telecom stocks. For more on the Egypt ETF and a closer look at the underlying economy, see this feature.

Disclosure: No positions at time of writing.