ETF Talk: Out of Africa

The headline above may make you recall the classic movie "Out of Africa." But even if you’re not a film buff, you need to know that Africa now has become a region with growing appeal for its intriguing investment opportunities. A case can be made that Africa offers vast potential for economic improvement that could reward intrepid investors who are not timid about taking a bit of risk.

One of the newest opportunities for investing in the region is the Van Eck investment firm’s recently rolled out fund, Market Vectors Africa (AFK). The ETF, launched during July, tracks the Dow Jones Africa Titans 50 Index. That index is used for companies that derive more than 50% of their revenues from 11 countries in Africa.

The ETF seeks to tap a fast-growing, emerging region that is becoming increasingly sought after by savvy investors who want to diversify their portfolios. The continent of Africa offers diversification by virtue of the array of the countries there. For example, the fund’s most heavily weighed companies are in Nigeria, 25%; South Africa, 25%; Egypt, 13%; and Morocco, 11%. But the ETF also includes companies in Canada, Norway, Kuwait and the United Kingdom that conduct most of their business in Equatorial Guinea, Zambia, Angola, Mali, DR Congo, Kenya and Ghana.

Africa presents a unique growth opportunity for those willing to enter a new investment frontier for a chance at heightened returns. Just how big is the growth potential? Well, Africa boasts 15% of the world’s total population and 20% of the world’s land mass. Yet, the region currently is one of the world’s poorest and least developed. Expect that disparity between the developed countries and the developing African nations to change. No, it won’t happen overnight. But it will take place in time.

Of course, I will keep my eye on the new Van Eck ETF for possible future investment. However, it currently has a limited track record and falls short of the trading volume of 100,000 shares a day that I like to see before entering a position.

Other reasons why I like the African region for investment exposure include increased trade flows, improved economic leadership, strengthening foreign demand for its goods, economic development initiatives and rising liquidity. At the same time, people in Africa are starting to enjoy increased incomes that will better enable them to buy cell phones, appliances, and cars. In addition, government policies and economic reforms are promoting growth.

The result is that Africa has enjoyed strong growth for much of the past decade. Sub-Saharan Africa’s economic growth has averaged 6% per year since 2004. The region also has produced the fastest pace of growth anywhere in the world during the past three decades. Growth during the last decade has been less volatile and more evenly distributed among the region’s countries than in the past.

As a result, I consider Africa a place to look to find emerging market investment opportunities — and the new Van Eck ETF might be one way to do so.

As always, I encourage my readers to send me their ETF questions. If you have one that you want me to answer in an upcoming issue, please click here.