New Market Vectors ETF Covers Africa

July 14, 2008

The new fund covers both emerging and frontier markets,domestic and offshore stocks.

Now that the first frontier markets exchange-traded fundshave been launched, does that mean we will see a steady trickle of these typesof funds into the market?

Van Eck is the latest ETF provider to enter the area. Itactually has a few frontier market ETFs in registration, and it's launching thefirst of them today - the Market Vectors Africa Index ETF (NYSE Arca: AFK). AFKis the first ETF to cover specifically African markets, although just last weekthe PowerShares MENA Frontier Countries Portfolio (NASD: PMNA), which coversthe Middle East and North Africa.

The Market Vectors ETF tracks the Dow Jones Africa Titans 50Index, which covers 50 stocks from 11 different markets on the continent:Nigeria, South Africa, Egypt, Morocco, Equatorial Guinea, Zambia, Angola, Mali,DR Congo, Kenya and Ghana. Keep in mind that the underlying index is notdesigned specifically to cover exclusively frontier markets in Africa; rather,it is a regional index covering African markets. African markets are mostlyfrontier markets, but South Africa and Egypt are examples of countries in theindex typically classified as emerging-and they together make up nearly 40% ofthe index's total exposure.

Also, an interesting thing about this index is that many ofthe companies in the index are not actually domiciled in Africa but derive amajority of their revenues from African markets, with the most revenues beinggenerated from the specific market with which they are associated. Egypt, SouthAfrica, Nigeria, Kenya and Morocco fit Dow Jones' definition of investablemarkets and are represented by companies domiciled within their borders (andsome that are not), while the remaining countries are represented in the index solelyby offshore companies.

"The investor has the chance to invest in a pan-Africanportfolio while at the same time participating in the high liquidity andperformance of international securities," said Van Eck Global Principal Jan VanEck of the index.

The hybrid nature of the DJ Africa Titans 50 Indexhighlights one of the problems of investing in frontier markets, frontiermarkets offer diversification, but they are also, by definition, smaller andless liquid than emerging markets, which makes them difficult to invest in. Thethree ETFs currently trading that could be considered "frontier" ETFs are notreally "pure" frontier.

The first fund to launch, the Claymore/BNY Frontier Markets ETF(AMEX: FRN) includes Poland, Chile and Egypt in its top three countries; allare typically classified as emerging markets by the major index providers, andtogether they represent more than 60% of the fund. PMNA covers the Gulf Coastand North Africa - all of its represented countries, except for Lebanon, areactually classified as emerging markets, not frontier markets, by Standard& Poor's.

A pure frontier market ETN does not actually exist yet, andAFK does not claim to be one. Nowhere in the fund's name or that of it'sunderlying index does the word "frontier" actually appear. However, it doesprovide access to some frontier markets.

 

AFK's underlying index is weighted by market capitalization,with the maximum weights for individual countries and companies at rebalancingset to 25% and 8%, respectively. Also, a country cannot be represented in theindex by more than 15 companies. Components must have market capitalizations of at least $200 million,with at least $1 million in three-month average daily trading volume.

The top five components are Mobile Telecommunications Co. at7.19%, Tullow Oil PLC at 6.12%, Sasol Ltd. at 4.66%, First Bank of Nigeria PLCat 4.35% and Orascom Telecom Holding at 4.08%. Nigeria has the largest countryweighting at 25.2% for domestic stocks and 7.3% for offshore stocks - a grandtotal of 32.5% of the index. It is followed by South Africa at 24.7% (plus 1.5%offshore), Egypt at 13.1%, and Morocco at 11.4%.

Banks are the largest sector at 33.7% of the index, followedby Basic Resources at 18.2%, Oil & Gas at 13.5%, Telecommunications at10.2% and Technology at 7.3%.

AFK is fairly expensive, with its gross expense ratio of1.20% waived down to a net expense ratio of 0.83%, which makes it moreexpensive than PMNA, which charges 0.70% after some costs are waived, and FRN,which charges 0.65%.

So far, a pure frontier market ETF has been elusive, but forinvestors seeking exposure to Africa and the opportunity it represents, AFK maybe just the thing. However, it represents a play on a particular region, notjust the frontier markets in that region.

Readthe prospectus for AFK here.

 

Country

Weight

Nigeria

25.20%

South Africa

24.70%

Egypt

13.10%

Morocco

11.40%

Nigeria - Offshore

7.30%

Equatorial Guinea - Offshore

6.20%

Zambia - Offshore

3.40%

Angola - Offshore

2.00%

Mali - Offshore

1.70%

DR Congo - Offshore

1.50%

South Africa - Offshore

1.50%

Kenya

1.20%

Ghana - Offshore

0.70%

 

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