5 Most-Needed Niche ETFs

March 26, 2014

From sub-Saharan Africa to Eastern Europe, untapped markets still exist.

In a world of 1,575 ETFs, issuers are increasingly forced to stretch their imaginations to roll out something new and different.

I’ve got to admit that these days, more often than not, I’m rolling my eyes at most ETF filings.

That’s expected. Most investable markets have already been tapped into, and finding an untapped niche market is now akin to finding a needle in a haystack.

That said, every once in a while, a new ETF makes me wonder why it wasn’t launched earlier. I’ll admit I’ve also been proven wrong about a few new ETFs that I thought were going nowhere but ended up raking in big assets.

I’m going to point out five niche markets that haven’t been tapped yet by an ETF that I think have big potential if an issuer were able to launch such a fund.

Here are my top picks, along with explanations on their need. I’ve also included the closest available ETFs and what’s brewing in the pipeline in each space.

1) Sub-Saharan Africa ex-South Africa ETF

This one’s a no-brainer to me, and I’m pretty confident we’ll see a launch in this space in the coming year or two. Many smaller African nations have been growing at impressive clips due to their vast natural resources, cheap labor and renewed political stability.

As labor costs rise in China, multinationals are beginning to look elsewhere. South East Asia and Africa have been beneficiaries on that front, as Stratfor’s George Friedman recently pointed out in our Alpha Think Tank publication. News of Unilever’s plans to open a manufacturing plant in Ethiopia is only the latest, but not the last, plan we’ll hear about on that front.

Early in the year, Matt Hougan, president of ETF.com, highlighted the Market Vectors Africa ETF (AFK | D-28), as one of his top three picks for 2014, while voicing his concerns about AFK’s heavy weighting to South Africa, an emerging market.

It’s important to separate emerging South Africa from frontier Africa. In terms of economic prowess, South Africa is in its own league on the continent. It’s now often included with the BRIC economies, becoming the fifth wheel under the new acronym, “BRICS.” That’s why South Africa overwhelmingly dominates any ETF targeting Africa.

If you strip out South Africa, Egypt and Morocco, this new sub-Saharan Africa ETF would provide broad, diversified exposure to “frontier” African economies like Nigeria, Kenya, Mauritius, Botswana, Ivory Coast and Ghana.

  • Closest available option:
  1. AFK
  2. Global X Nigeria ETF (NGE | F-53)
  • In the pipeline:
  1. iShares MSCI EFM Africa ex-South Africa ETF
  2. Global X sub-Saharan Africa ETF

 

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