Another ETF Proving Vulnerable to Domestic Strife

June 18th at 8:10am by Tom Lydon

A significant part of the risk that comes along with investing in emerging and frontier markets is political risk and the chance that local violence can pressure a countries equity market. The iShares MSCI Turkey Investable Market Index Fund (NYSEArca: TUR), once a darling among emerging markets ETFs, has shown investors that when citizens and their government clash, the result is usually bad for investors.

TUR has plunged 16% in the past month and the Market Vectors Egypt ETF (NYSEArca: EGPT) has lost almost 14% for many of the same reasons, but those are not the only developing world ETFs that have been stung by local violence. [Egypt ETF Rocked by Protests]

The new Global X Nigeria Index ETF (NYSEArca: NGE) is struggling with a similar fate. Just over two months old, NGE is the first ETF to exclusively track Nigeria. The country is Africa’s second-largest economy behind South Africa, the continent’s largest oil producer and a member of the Organization of Petroleum Exporting Countries.

Nigeria also depends on oil for the bulk of its government revenue, so it is not surprising that many view NGE as an oil play, although financials are the ETF’s largest sector weight at 41.3% compared to 24.3% for energy, according to Global X.

Oil prices have been rising over the past few weeks, but that is not helping NGE. The ETF is off more than 8% since June 10 as various forms of violence have surfaced in Nigeria, a frontier market. Last Thursday, Nigeria’s Movement for the Emancipation of the Niger Delta (MEND) confirmed it was responsible for attacks on some oil assets there and threatened further attacks.

Attacks such as kidnappings and bombings of oil installations by groups including MEND cut more than 28 percent of Nigeria’s oil output between 2006 and 2009, reports Elisha Bala-Gbogbo for Bloomberg.

Nigeria can ill afford lost oil production at a time when it is searching for new customers to replace dwindling exports to the U.S. Soaring oil production in the U.S. has damped demand for Nigerian imports because oil harvested here is of similar quality to Nigeria’s light, sweet crude. [ETFs for Soaring U.S. Oil Production]

Then on Monday, NGE closed slightly lower after Islamist extremists reportedly attacked a school killing 11, including seven students. That news came after President Goodluck Jonathan admitted late last month that extremists control some Nigerian towns following attacks that left more than 20 Nigerians dead.

Moreover, these are not Nigeria’s first bouts with violence. Some of the world’s largest oil companies, including Royal Dutch Shell (NYSE: RDS-A), have complained about rebel attacks on oil assets and kidnappings of employees. The country is neither politically stable nor bereft of corruption. None of this means NGE is bad ETF, but Nigeria is equal parts potential profit and potential peril. Expect NGE to go along for the ride…good or bad.

Global X Nigeria Index ETF

 

ETF Trends editorial team contributed to this report.

The opinions and forecasts expressed herein are solely those of Tom Lydon, 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.

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