Investors who are more risk tolerant should take a closer look at Africa-related exchange traded funds capitalize on the growth story in the emerging markets.
For instance, the iShares MSCI South Africa ETF (NYSEArca: EZA) is includes a portfolio of well-run financial services, telecommunication and consumer companies that have penetrated markets across Africa, writes Morningstar analyst Patricia Oey.
“As such, this exchange-traded fund can be used to gain exposure to healthy growth trends on the African continent,” Oey said. “This ETF can also be used tactically to add South African exposure to a diversified portfolio–South African stocks account for about 7% of the value of the MSCI Emerging Markets Index.”
However, EZA holds South African rand-denominated securities, so the fund is subject to currency risks.
Looking at the ETF’s underlying index, the MSCI South Africa Index components have generated steadily higher earnings over the past decade, with the exception of 2009, volatility of returns has been in line with the S&P 500 and the top companies have increased dividends over the past five years.
South Africa’s economy is expected to expand 3% in 2014 as ongoing strikes in the mining industry, high unemployment and shortage of skilled laborers weight on the economy. Meanwhile, east and west African regions are expected to see growth rates of 6% to 7%.
Alternatively, investors can take a look at broader Africa-related ETFs. The Market Vectors Africa Index ETF (NYSEArca: AFK) weights countries determined by the size of its gross domestic product and includes companies that are headquartered in or generate the majority of their revenue in Africa. Top country allocations include Egypt 21.2%, South Africa 18.3% and Nigeria 16.6%. [Stimulus Package Could Bolster Egypt ETF]
ETF investors can also take targeted exposure to Egypt and Nigeria through the Market Vectors Egypt Index ETF (NYSEArca: EGPT) and Global X Nigeria Index ETF (NYSArca: NGE). [Nigeria ETF: A Froniter Markets Star]
The SPDR S&P Emerging Middle East & Africa ETF (NYSEArca: GAF) is a play on South Africa and some Sub-Saharan African countries. Country allocations include a hefty 93.1% to South Africa, 4.1% to Egypt and 2.7% to Morocco.
For more information on Africa, visit our Africa category.
Max Chen contributed to this article.