Breaking Down The African ETFs (AFK, GAF, EZA, NGE)

When searching for growth potential around the globe an investor will more often than not be drawn to the continent of Africa.

The estimates end to vary, however in general most experts believe GDP for the continent will exceed five percent in 2014, well above the growth expectations of the U.S. and other developed regions.

The large land mass is made up of varying types of countries that rely on a plethora of industries and that have difference political situations. The majority of the countries do not have governments that are stable enough to provide investment opportunities to Western investors.

This makes investing in the continent as a whole risky in many investors’ opinions. But, with above average risk comes above average return potential.

Africa ETFs

Market Vectors Africa ETF AFK

The $114 million ETF has been around since the middle of 2008 and in that time has struggled to outperform many of its peers. The ETF is heavily concentrated on the financial stocks of the region (40 percent), followed by 35 percent in the energy and material stocks.

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The largest exposure for the ETF is Egypt (23 percent), South Africa (19 percent), and Nigeria (15 percent). While Egypt has been strong over the last 12 months, both South Africa and Nigeria have lagged. This has held AFK back and the ETF is only up three percent in the last year.

SPDR S&P Emerging Middle East & Africa ETF GAF

The ETF has been around for 7 years and currently has $62 million in assets. Over the last year the ETF has lagged AFK as it has lost three percent. The main reason for the underperformance has been the large exposure to South Africa (93 percent).

The remaining portfolio of the portfolio is invested in Egypt and Morocco. The unusually large exposure to one country makes GAF in essence a South African ETF and investors should not be duped into believing the ETF offers exposure to the entire region.

Country ETFs

iShares MSCI South Africa Index ETF EZA

The ETF has over $478 million in assets, but has a similar 12-month return as GAF, losing four percent in the last year. The ETF is composed of 51 stocks with a quarter of the portfolio in both the financials and consumer discretionary sectors.

The economy of South Africa can be very different from its neighbors to the north. South Africa is an emerging market, whereas most other African nations are considered frontier markets and are in the early stages of development. The country’s reliance on commodities and materials has hurt its performance over the last few years.

Global X Nigeria Index ETF NGE

Losing 10 percent over the last year, NGE is the worst performer of the highlighted African ETFs. With that being said, it is the most exciting opportunity and has the most upside potential. The small ETF, only $12 million in assets, is nearly one year old.

Most investors think energy when Nigeria is mentioned, however the ETF is composed of 44 percent financial stocks and 20 percent consumer staples to go with 27 percent in the energy sector. The ETF recently tested its all-time low at $13.60 and was able to bounce. Even though the ETF has lagged, the recent action is bullish and could be the first signal in a buying opportunity.

When it comes to investing in emerging and frontier markets there is one trait that investors must possess – patience. Investors cannot expect to make big money overnight as the path to growth can be volatile and take time.