ETF Showdown: Out of Africa

Film buffs may remember the 1985 flick “Out of Africa” directed by Sydney Pollack and starring Robert Redford and Meryl Streep. That movie had nothing to do with ETFs and we couldn't get a hold of any famous movie stars for this piece, but this this week's ETF Showdown will be Benzinga's own version of “Out of Africa” as two ETFs tracking the frontier continent square off. That means the SPDR S&P Emerging Middle East & Africa ETF GAF is in one corner and the Market Vectors Africa ETF AFK is in the other. Both funds have long enough track records to give us ample data to work with and draw potentially useful conclusions. GAF, with an expense ratio of 0.59% and assets under management of almost $99.1 million, will celebrate its fifth birthday next March. AFK, with an expense ratio of 0.78% and AUM of $76.4 million, turned three in July. A crucial factor to acknowledge with both AFK and GAF is that the names of both funds are somewhat misleading. What we mean is that in the case of the SPDR offering is that South Africa accounts for almost 89% of the ETF's weight with Egypt and Morocco making up the rest. Anyone that wants that much exposure to South Africa might as well go for 100% and buy the iShares MSCI South Africa Index Fund EZA. AFK is better as South Africa accounts for just under 26% of the ETF's weight, but non-African countries get a 25.5% weight. Who knew that an ETF with Africa in its name would give you 15% to the U.K.? In AFK's defense, it is one of only a few ETFs with meaningful exposure to Nigeria (18.5%), but an almost 17% allocation to Egypt is a black mark. At the sector level, AFK is dominated by financials to the tune of 40%. Materials, energy and telecom names account for another 46% of the fund's weight. GAF is better in terms of sector diversity, but only marginally, as four industry groups – financials, materials, consumer discretionary and telecom – represent about 75% of that fund's weight. Both ETFs have moved in lockstep with each other in 2011 and that's not a good thing as the year-to-date losses work out to be about 23%. We think AFK will decouple from GAF going forward and be the better Africa play because of its superior Nigeria exposure, which means better oil exposure. The assumption that oil prices will rise in the coming years bolsters the reasons for at least looking at AFK and crowning the ETF the winner of this week's showdown.