A Possible Change Looms For A Popular Frontier ETF

There are seven single-country exchange traded funds dedicated to members of the Organization of Petroleum Countries (OPEC). With the exception of three ETFs tracking Indonesia, which recently rejoined OPEC, other OPEC ETFs have been drab performers.

That is particularly true of the Global X MSCI Nigeria ETF NGE. Nigeria's status as Africa's largest oil producer becomes a drag on Nigerian stocks and NGE when oil prices falter. That much is confirmed by NGE's year-to-date loss of 14.7 percent and a one-year decline of more than 40 percent.

As the lone ETF dedicated to Nigerian stocks, NGE bears the brunt of the impact when equities in Africa's largest economy slip. Faltering Nigerian stocks and oil prices also affect the iShares MSCI Frontier 100 ETF FM. FM has one of the largest weights to Nigerian stocks of any ETF after NGE at 11.5 percent.

FM is home to just two OPEC members (Kuwait is the other), but the ETF's exposure to oil prices is well documented and confirmed by its one-year loss of over 21 percent. Whether it happens or not remains to be seen, but there is a chance FM will be freed of the burden of its Nigeria exposure. 

Last week, index provider MSCI said it is mulling the removal of Nigeria from its frontier markets benchmarks, citing the country's sliding currency and related issues as one reason why Nigeria could be banished to index purgatory.

Currency woes in Nigeria have prompted ““continuous deterioration of foreign-exchange market liquidity,” said MSCI.

If MSCI proceeds with booting Nigerian stocks from its frontier indexes, about $500 million in capital would be affected, reports Emerging Equity, citing Renaissance Capital. 

“Nigeria, Africa’s largest crude producer, an OPEC member state, is facing its worst crisis in decades amid a plunge in the price of oil which has battered its economy by slashing revenues and put the nation’s currency, the naira, under immense downward pressure as it fell to record lows, prompting the Central Bank to peg its currency and introduce curbs to protect foreign exchange reserves, which have fallen to an 11-year low,” according to Emerging Equity.

History shows that MSCI does not take index promotions or demotions lightly. There was previously speculation that Argentina could lose its frontier status, but that has not happened. Likewise, it took seven years of Qatar and United Arab Emirates being on MSCI's list for possible promotion to emerging markets status to actually earn that elevation.

Including FM and NGE, six U.S.-listed ETFs have exposure to Nigerian stocks.