Africa ETFs: Cure For The Common Portfolio?

by on July 5, 2012 | ETFs Mentioned:

When asked to identify the economies that are posting the most substantial GDP expansion in the current environment, many investors would quickly respond with China, India, and other well known emerging markets. Those two countries are certainly among the leaders in terms of global economic growth; both are expected to expand at clips greater than 5% for the foreseeable future. But their integration into global markets also makes them vulnerable to adverse developments in places such as Europe, a relationship that we’ve been reminded of quite frequently in recent months.

Another less publicized source of expected GDP growth in coming years–at least according to the World Bank–is Africa. Though the continent faces no shortages of challenges in a quest to ultimately become part of the developed world, the economy there is showing tremendous promise and emerging as a potentially attractive investment destination. Nigeria’s economy is expected to grow at 7% this year and 7.2% next year, far outpacing the developed world and many larger emerging economies as well. Angola, another major sub-Saharan economy, is expected to expand by more than 8% in 2012 and close to 7.5% in 2013 [get the free ETFdb newsletter].

Moreover, African economies are more insulated from troubles in other regions of the world, since these markets depend primarily on local consumption to drive growth. That lower correlation has obvious appeal in the current environment where all assets seem to take their cues from European markets. 

Africa ETFs

For those U.S. investors who believe Africa represents a compelling growth opportunity, the challenge is finding efficient, affordable ways to invest in African markets. There are a handful of ETFs out there that target the continent, though some are limited in their ability to tap into the true African growth story. Specifically, many ETFs that maintain exposure to Africa are tilted heavily towards South Africa, an emerging market that is expected to post far lower growth rates in coming years. Below, the Africa ETFs are highlighted:

  • Market Vectors Africa ETF (AFK): This ETF offers exposure to several economies of Africa, including South Africa, Nigeria, and Egypt. AFK does have a relatively high concentration in a few sectors; banks make up close to a third of assets, while materials and energy combine for about 28% or so. AFK charges a net expense ratio of 72 basis points. 
  • SPDR S&P Emerging Markets Middle East & Africa ETF (GAF): This ETF is perhaps a bit misleading; the underlying portfolio consists almost entirely of South African stocks (90% of total assets), with a smattering of exposure to Egypt and Morocco. From a sector perspective, GAF is also tilted towards banks and materials stocks; those two sector make up close to 45% of assets. There is, however, a meaningful allocation to consumer stocks, which account for almost 25% of the portfolio. 

Van Eck has filed plans to launch a Nigeria ETF that would specifically target that high risk / high return economy. That product, if launched, could represent the best path into the compelling sub-Saharan African growth story, delivering access to stocks in a market that has expanded dramatically in recent years and is expected to post one of the highest GDP growth rates in the world between now and 2014.

ETF YTD Gain 200 Day Vol.
S&P 500 SPDR (SPY) 10.1% 14.3%
MSCI EM ETF (VWO) 6.5% 21.7% 
Africa ETF (AFK) 11.7% 18.1%

Disclosure: No positions at time of writing.