Africa ETFs: ‘Pack Your Patience’
June 19th, 2013 at 11:42am by John Spence
Market Vectors Africa Index (NYSEArca: AFK) is the only ETF that provides pure exposure to the continent’s expanding economy but potential long-term investors should be ready for a bumpy ride.
“For investors, there are some exchange traded funds focused on Africa. While the vehicles are ready to go, investors should climb aboard only if equipped with ample supplies of patience,” writes John Prestbo, former editor and executive director of Dow Jones Indexes, for MarketWatch.
AFK holds assets of $94 million and charges a net expense ratio of 0.80%.
There are also single-country ETFs for Africa such as Market Vectors Egypt (NYSEArca: EGPT) and iShares MSCI South Africa (NYSEArca: EZA). [More Problems Looming for South Africa ETFs]
The Egypt fund has been hit recently by political instability as investors keep a close eye on the protests in Turkey. [Egypt ETF Rocked by Protests]
Another ETF that partially invests in Africa is SPDR S&P Emerging Middle East & Africa (NYSEArca: GAF). Frontier market ETFs also have allocations to Africa. [Investors Exploring Frontier Market ETFs]
Turning back to AFK, Prestbo notes the ETF’s tracking index incorporates rules designed to maintain a diversified portfolio.
“First, weightings are limited so that South Africa — the continent’s largest economy with the largest companies — doesn’t dominate the index. The weight of each country is capped at 25% and the ceiling for each component stock is 8%,” he wrote.
“Second, non-Africa-listed stocks also are eligible, provided the companies generate the majority of their revenues in Africa. Thus, United Kingdom companies make up 17% of the index’s float-adjusted market cap,” Prestbo added.
Investors in Africa ETFs should be prepared for volatility. AFK has a three-year standard deviation of 17.6, versus 14 for the S&P 500, according to Morningstar.
“Occasional periods of scrumptious returns are interspersed among interludes of treading water or steep declines. Emerging and frontier markets are vulnerable to vicious volatility as investment capital sloshes in and out,” Prestbo notes.
“This boom-bust cycle might tempt some investors to try tactical timing to reap the fat returns and duck the disasters. But if market timing is a fool’s game with U.S. stocks, it’s sheer insanity for a whole region, and an unfamiliar one at that. Africa cries out for long-term investment, and my prediction is that in time those providing it will be rewarded,” he said.
Prestbo concluded: “Just don’t forget to pack your patience.”
Market Vectors Africa Index
The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.