A Look At South Africa ETF Options

by on June 10, 2010 | ETFs Mentioned:

When the soccer World Cup kicks off in Johannesburg this weekend, it will mark the beginning of one of the most anticipated sporting events of all time. The month-long tournament will showcase the world’s finest athletes and most passionate fans on a global stage. But also on display over the next four weeks will be the country of South Africa, home to one of the largest non-BRIC emerging economies and an increasingly popular investment destination. 

In most of the world, South Africa is best known as the country that ended apartheid in the mid-1990s, electing former political prisoner Nelson Mandela as president. But South Africa is also home to one of the world’s most unique economies, with some sectors showing characteristics typically associated with developed markets and others clearly reflecting emerging status.

Thanks to WTO membership and trade agreements with the U.S., China, Japan, and EU, South Africa’s export sector has surged. Unlike many African countries, South Africa’s agricultural sector is not dominated by subsistence farming, and actually exports agricultural products to the rest of the continent. The last 15 years have witnessed tremendous progress in implementing economic overhauls in South Africa. High tariffs and anti-competitive behavior have subsided significantly, and government intervention in the private sector has gradually declined. Improved intellectual property laws and reduced corporate taxes have attracted interest from overseas, including big investments from Barclays and Vodafone in recent years.

Like many emerging markets, South Africa is rich in natural resources, including platinum, gold, coal, and diamonds. As such, the health of the overall economy depends heavily on natural resource prices, and commodity bear markets can weigh heavily on overall economic growth. There are a number of other significant hurdles to growth in South Africa as well. The country has the highest number of HIV infections in the world, and loses a big chunk of educated students to overseas markets every year. Electricity shortages are common, causing many to worry that the World Cup will drain resources from other areas of the country.

With visitors from around the world flocking to South Africa this month, the local economy figures to get a boost from tourist spending. The event also gives South Africa a chance to show off its infrastructure and culture to the world, a display many hope will help to boost foreign investment and lead to longer-term capital inflows.

South Africa ETF Plays

With the impressive rise of the ETF industry, South African markets are more accessible than ever before. South African equities make up a component of many popular diversified emerging markets ETFs, and there are also multiple products offering more “pure play” exposure to the country (sign up for our free ETF newsletter):

  • iShares MSCI South Africa Index Fund (EZA): This ETF tracks the MSCI South Africa Index, a benchmark that includes the largest and most liquid South African equities. Reflecting the composition of the South African economy, EZA has a big tilt towards industrial materials, which make up more than 30% of total assets. A number of mining firms, including AngloGold Ashanti and Anglo Platinum, account for big chunks of assets.

  • Market Vectors Africa Index ETF (AFK): This ETF tracks the Dow Jones Africa Titans 50 Index, a benchmark that measures the performance of companies headquartered in Africa or that generate the majority of their revenues in Africa. South African equities account for about 25% of AFK assets, the largest weighting given to an individual country. Also receiving big weightings are Egypt (20%), Nigeria (18%), and Morocco (12%).

  • WisdomTree Dreyfus South African Rand Fund (SZR): This actively-managed ETF is designed to achieve returns reflective of both changed in the value of the South African Rand relative to the U.S. dollar as well as money market rates in South Africa. Currently, money market rates in South Africa are north of 6%, a far cry from many developed markets where rates continue to hover near record lows.

Disclosure: No positions at time of writing.