When it comes to diversifying a portfolio, many investors turn toward emerging market equities for their lucrative potentials. And while BRIC and other popular Asian nations are usually investors’ top picks to achieve this key exposure, investors may benefit from taking a closer look at an often overlooked opportunity: Africa. Though known for its geopolitical instability, many have taken on a rather bullish outlook for this economic region, as growth continues to flourish year after year [see the Africa-Centric ETFdb Portfolio with a free seven-day trial to ETFdb Pro].
While many still remain understandably skeptical about investments in this corner of the world, analysts have painted a rather optimistic picture about the future of Africa’s economy. Since 2000, the continent’s GDP has grown by roughly 5% every year, highlighting the potential value of this region. This appealing growth rate has been attributed to several factors, with population growth and demographics believed to be the biggest influences.
Africa has had the “right kind” of population growth over the years, as Africans continue to live increasing longer while having fewer children. Expanding urbanization has also lured investors, as cities have begun to flourish and grow more efficiently. Technological developments have had perhaps the most profound impact on the continent’s economy, as more and more Africans are beginning to use technology in their everyday lives.
Africa is also known for its abundance of natural resources, and its trade ties to many developing Asian nations have proved to be long-standing and lucrative inflows for the country. And as China’s need for Zambian copper, Nigerian oil, Tanzanian timber and South African platinum grows, investors with exposure to this corner of the market may be in a prime position once the global economic recovery picks up.
Through there are still many barriers to success, namely the continent’s high levels of corruption amongst government officials, inadequate investments in education and healthcare, barriers to entry for new businesses, as well as a lack of quality infrastructure, Africa’s growth potential is still quite high. For those looking to add exposure to this overlooked corner of the world, we outline several ETF options [Download Free Report: How To Buy The Right ETF Every Time]:
|Ticker||ETF||Expense Ratio||Number Of Holdings||Top Sector||Top Holding|
|EZA||MSCI South Africa Index Fund||0.59%||52||Communication Services (22%)||Mtn Group Limited (11%)|
|AFK||Market Vectors-Africa Index ETF||0.78%||51||Financial Services (36%)||Tullow Oil PLC (7%)|
|EGPT||Egypt Index ETF||0.94%||27||Communication Services (15%)||Commercial International Bank Egypt (8%)|
|EIS||MSCI Israel Capped Investable Market Index Fund||0.59%||71||Health Care (22%)||Teva Pharmaceutical Industries (21%)|
|SZR||Dreyfus South African Rand Fund||0.45%||n/a||n/a||n/a|
|GAF||SPDR S&P Middle East & Africa ETF||0.59%||136||Financial Services (20%)||Mtn Group Limited (8%)|
|MES||Market Vectors Gulf States Index ETF||0.99%||42||Financial Services (48%)||Mobile Telecommunications Company (8%)|
|GULF||Middle East Dividend ETF||0.88%||52||Financial Services (33%)||Mobile Telecommunications Company (11%)|
MSCI South Africa Index Fund (EZA)
This ETF is by far the largest and most popular option for investors looking for African equity exposure, though its assets are targeted towards only the South African region. EZA has amassed over $490 million in assets, and its shares exchange hands nearly 3850,000 times a day. The fund holds roughly 50 individual holdings, the majority of which are large and mid-cap companies. Communication services, financials, basic materials and consumer cyclicals account for the majority of total assets, though modest exposure is given towards energy and industrial securities. Over the last three years, EZA has gained nearly 24% and it currently boasts an annual dividend yield of 3.23%.
Market Vectors-Africa Index ETF (AFK)
Van Eck’s AFK may be more appealing for those who want to cast a broader net over the African equities space. Despite having approximately the same number of holdings as EZA, AFK’s exposure is not limited to South Africa and features allocations to equities from Nigeria, Egypt, Mali, and Morocco, Mali, and Kenya. Investors should note, however, that the fund is not a “pure play” on the African economy, as holdings from the United Kingdom, Canada, Norway and Australia make an appearance in AFK’s portfolio [Compare any two ETFs with our Head-To-Head ETF Comparison Tool].
Egypt Index ETF (EGPT)
For those looking to zero in on a particular country, the Egypt Index ETF is a compelling option. Egypt has the second-largest economy in Africa and is the most populous nation on the continent as well as in the Arab World. As its economy continues to grow, EGPT may become a rewarding tactical holding for those investors willing to stomach the risk. The fund, however, has a rather shallow basket of securities, less than 30 in total, and is mainly comprised of communication services, financial, basic material, industrial and energy holdings. Over the last year, EGPT has jumped a whopping 35% [see also 5 ETF Superstars of 2012].
MSCI Israel Capped Investable Market Index Fund (EIS)
Another country-specific ETF, EIS is designed to measure the performance of the Israeli equity market. The fund is comprised of roughly 70 individual securities, with the top ten holdings accounting for over two-thirds of total assets. The majority of holdings are mid and small-cap companies, giving investors a nice potential for future growth. In terms of sector allocations, EIS is heavily tilted towards healthcare and financial stocks, which account for nearly half of the portfolio.
Dreyfus South African Rand Fund (SZR)
While the lineup of Africa equity ETFs has grown in recent years, there is still only one option for those looking to add currency exposure to their portfolios. SZR is an actively-managed ETF that seeks 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.
Middle East & Gulf State Options
Investments in the Middle East and in countries belonging to the Gulf Cooperation Council (GCC) have also grown tremendously over the years, despite the region having a tendency to exhibit significant volatility. Currently, there are only three broad-based options for those looking to add exposure to this region:
- SPDR S&P Middle East & Africa ETF (GAF): This ETF holds a basket of roughly 140 stocks, and although this is labeled as a Middle East and Africa ETF, investors should note that the majority of this fund is concentrated in South Africa.
- Market Vectors Gulf States Index ETF (MES): MES is designed to target companies that obtain the majority of their revenues from, or are domiciled in, countries that belong to the Gulf Cooperation Council, including Kuwait, Qatar and the United Arab Emirates.
- Middle East Dividend ETF (GULF): This fund offers targeted exposure to companies based in the Middle East with high dividends, although it features a shallow, top-heavy portfolio, consisting of less than 50 securities. GULF currently boast a juicy 4.44% annual dividend yield.
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Disclosure: No positions at time of writing.