Time For An Africa ETF?

by on July 12, 2010 | ETFs Mentioned:

For investors looking to establish emerging market exposure, the economies of the BRIC nations are generally the default option. As growth has ground to a halt in the world’s developed economies, interest in emerging markets has surged and investors have begun digging deeper to uncover promising growth opportunities in the developing world. For those with the ability to tolerate a bit of risk, Africa has emerged as an interesting opportunity for exposure to frontier markets.

Africa is expected to experience tremendous economic growth over the next several decades; evidence of this boom has already materialized. Africa’s GDP grew by nearly 5% every year from 2000 to 2008. The continent’s consumer, agricultural, natural resource, and infrastructure sectors are projected to turn out revenues of $2.6 trillion a year by 2020.

The continent has a bounty of natural resources that are becoming increasingly attractive to foreign investors. Oil is expected to be at the center of the continent’s expansion; 10% of the world’s oil reserves are found within the borders of Africa. Africa also accounts for 60% of the world’s uncultivated, arable land, leading some analysts to predict an agricultural revolution for many sub-Saharan African nations (especially given the low crop yields). The McKinsey Global Institute, an economics research company, predicted agricultural output to increase from $280 billion yearly in 2010 to $500 billion in 2020 and $880 billion by 2030 [see Beyond the BRIC: Ten Country-Specific Emerging Markets ETFs].

While some think African economies have a green light, others are riding the brakes and proceeding with caution. Africa has to deal with a range of serious issues that act as major hurdles to economic growth, including HIV/AIDS, food shortages, severe poverty in certain areas, and lack of sufficient vaccines and medical infrastructure.

For investors seeking to make a play on Africa as a whole, there is one interesting option available to U.S. investors:

  • Market Vectors Africa Index ETF (AFK): This ETF replicates the Dow Jones Africa Titans 50 Index, a benchmark that provides exposure to publicly-traded companies that are headquartered in Africa or that generate the majority of their revenues in Africa. The fund holds 50 securities spread across a variety of industries, including oil, telecom, and financial institutions [see more of AFK's holdings here]. AFK allocates primarily to the financials (43%) and industrial materials (24%) sectors, with a focus on large and medium market capitalization firms. From a country perspective, South Africa, Egypt, Nigeria, and Morocco make up the top four allocations. Not surprisingly, these four countries also have the top real GDP’s for the continent.

World Cup Brings South Africa Under Microscope

South Africa is perhaps the most successful economy on the continent, attracting interest from investors around the world and recently winning the right to host the 2010 FIFA World Cup. Since the preparation for the cup began four years ago, GDP has increased anywhere from 0.5% to 2.2%; the exact number depends on what infrastructure projects one considers to have resulted from the Cup preparations. Overall, 300,000 jobs were created, putting a 2.7% dent in the unemployment rate, to ready the country for the globe’s most prestigious soccer event.

Heading into the event, investors were anxious to see how South Africa handled the global spotlight. Some expected that the month-long tournament would be marred by violence, but those fears never materialized. “A cataclysmic wave of violent crime in South Africa, the fear of so many World Cup killjoys, has simply not occurred,” writes Barry Bearak. “The criminals have put in a more indifferent showing than even the French players.”

The success of the recently-concluded World Cup has some hoping that the country will become an increasingly popular destination for global investors. But amidst all of the positives, South Africa is still battling a high unemployment rate and a high crime rate. For investors seeking strict exposure to South African markets, we outline two primary ETF options.

  • iShares MSCI South Africa Index Fund (EZA): This ETF follows the MSCI South Africa Index, an index which measures the performance of the South African equity market. This ETF’s 47 holdings focus primarily on the industrial materials (32%) and financials (27%) sectors. The fund invests in only large and medium market capitalization firms. While there is some overlap to AFK, this fund does not stray from a South Africa focus. The major holdings include  large gold and platinum firms, with several banks and telecom companies thrown into the mix.
  • WisdomTree Dreyfus South African Rand Fund (SZR): This actively-managed currency ETF offers exposure to the South African Rand, seeking to deliver total returns reflective of both money market rates in South Africa available to foreign investors and changes in value of the South African rand relative to the U.S. dollar [see more on SZR's fact sheet].

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Disclosure: No positions at time of writing.