Africa Etf: A Guide To Investing In The Continent's Future

Africa is rapidly becoming one of the most sought-after destinations for investors in emerging markets. The continent boasts extensive natural resources, a young and increasingly educated workforce, greater stability in governance, and more prospects for economic growth than in previous years. For investors, the easiest way to gain access to African shares is through regional exchange-traded funds (ETFs) or mutual funds that specialise in Africa. ETFs are baskets of securities that can be bought and sold on a stock market, generally tracking a benchmark and offering a low-cost passive investment approach. They are traded on US exchanges and provide built-in advantages of ease, diversification, and professional management.

The pros and cons of investing in Africa ETFs

Pros

• ETFs are a simple, low-cost way to invest in the whole African stock market.
• Africa ETFs allow you to invest broadly in African companies.
• African economies are typically smaller than those of developed countries, but this means they have more room to grow.
• Africa has extensive natural resources, a young and increasingly educated workforce, more stability in governance, and more prospects for economic growth than in previous years.
• Africa is rapidly becoming one of the newest destinations for emerging markets investors.
• Africa ETFs can be purchased like stocks, with the added benefit of professional management.
• ETFs are a form of index fund that aims to replicate the performance of a particular market or commodity index.
• ETFs can be bought and sold on a stock market and generally offer a low-cost passive investment approach.
• Investors can choose from different risk levels: high growth, moderate, and defensive.

Cons

• The range of Africa ETFs is still very limited due to less developed capital markets and political risks in many African countries.
• Some Africa ETFs have derivatives in their holdings that can create more risk for certain investors.
• ETFs in frontier markets like Africa are based on the assumption of full liquidity, which may not be the case.
• ETFs that don't hedge the currency risk are risky because if the foreign currency exchange rate fluctuates too much, the value of the ETF can go down.
• Africa is a riskier prospect for investors than more developed regions and should be approached with caution and due diligence.
• Domestic traders may face additional risks in the foreign stock market, such as less stringent regulations, unexpected taxes, and foreign securities priced in a foreign currency.

The best Africa ETFs for investors

Investing in African stocks is an increasingly attractive prospect for investors, with the continent's extensive natural resources, large and relatively cheap labour force, and growing stability in governance. The easiest way to invest in the African stock market is to invest in a broad-market index, which can be done at a low cost by using ETFs.

VanEck Africa Index ETF (AFK)

The VanEck Africa Index ETF (AFK) is one of the largest and most liquid ETFs focused on Africa. It tracks some of the largest and most liquid stocks in Africa, holding about 82 stocks. The fund's top holdings include companies from a range of sectors, including telecommunications, energy, banking, and media. Over the five years before 2023, the fund closed each year with an average 5.36% loss in net asset value (NAV).

IShares MSCI South Africa Index (EZA)

The iShares MSCI South Africa Index (EZA) is allocated primarily to mid-sized and large companies in South Africa, with a focus on the financial, materials, and consumer discretionary sectors. It is the most liquid Africa ETF, with $700 million in assets under management. Over the five years ending in June 2022, the fund gained average monthly returns of negative 1.87%.

Amundi Pan Africa UCITS ETF

This ETF tracks the SGI Pan Africa index, which is exposed to three zones: South Africa, Northern Africa (including Morocco and Egypt), and Sub-Saharan Africa (excluding South Africa). The fund's largest constituents are capped at 10%.

Xtrackers MSCI EFM Africa Top 50 Capped Swap UCITS ETF

This ETF tracks the MSCI Emerging and Frontier (EFM) Africa Top 50 Capped index, which focuses on the 50 largest companies from emerging and frontier markets in Africa. The fund has decent liquidity, with $79 million in assets under management and $500,000 trading daily on average.

IShares MSCI South Africa UCITS ETF

This ETF tracks the MSCI South Africa Capped index, which focuses on large and mid-cap South African stocks. The weight of the largest constituent is constrained to 33%, while the weights of all other constituents are constrained to a maximum of 18%.

While investing in Africa can provide access to emerging markets and high growth potential, it is important to remember that the continent is a riskier prospect for investors than more developed regions. Due diligence and caution are essential when investing in African stocks.

How to invest in African companies

Africa is rapidly becoming one of the most popular destinations for investors looking to expand into emerging markets. The continent boasts extensive natural resources, a young and increasingly educated workforce, greater stability in governance, and more prospects for economic growth than in previous years.

For investors looking to expand their portfolio to include African companies, there are several options to consider.

Exchange-Traded Funds (ETFs)

ETFs are baskets of securities that can be bought and sold on a stock market. They generally track a benchmark and offer a low-cost, passive investment approach.

Some popular ETFs with exposure to African companies include:

• VanEck Africa Index ETF (AFK): Tracks some of the largest and most liquid stocks in Africa, with a focus on South Africa, Morocco, and Canada.
• IShares MSCI South Africa ETF (EZA): The only pure-play option to invest in South Africa, with allocations to mid-sized and large companies in the financial, materials, and consumer discretionary sectors.
• VanEck Egypt Index ETF (EGPT): Provides access to Egypt, the third-largest economy in Africa, with an allocation of around 93%.
• Market Vectors Africa Index ETF (AFK): Includes exposure to companies with significant business in Africa, such as Tullow Oil and Old Mutual PLC.
• IShares MSCI South Africa Index Fund: Similar to the iShares MSCI South Africa ETF, this fund is allocated to mid-sized and large companies in South Africa.
• SPDR S&P Emerging Middle East & Africa GAF (GAF): Similar holdings to EZA, with a focus on Naspers Ltd., Mtn Group Limited, Sasol Ltd., AngloGold Ashanti Limited, and Standard Bank Group Ltd.

Mutual Funds

Mutual funds are another option for investing in African companies. These funds typically invest in a large basket of securities, targeting specific economic sectors or regions. Some notable examples include:

• T. Rowe Price Africa and Middle East Fund (TRAMX): Focused on banks and companies in Africa, the Middle East, and select European companies doing business in the region.
• Commonwealth Africa Fund (CAFRX): Invests primarily in equity and debt securities issued by African companies in manufacturing and mining.
• Templeton Frontier Markets TFMAX: This fund is not a pure play on Africa but includes exposure to the region.

American Depositary Receipts (ADRs)

ADRs are a way for investors, particularly those in the United States, to trade select African stocks. These securities represent shares in a foreign-registered company, allowing investors to trade on a U.S.-based stock market. Some African companies that can be traded through ADRs include:

• AngloGold Ashanti (AU)
• DRD Gold (DRD)
• Gold Fields (GFI)
• Harmony Gold (HMY)
• Randgold (RNDFX)
• Sibanye Gold (SBSW)
• Sasol (SSL)
• MiX Telematics (MIXT)

Direct Investment

It is also possible to invest in African stocks directly, although this may come with additional risks. Some foreign stocks trade on North American exchanges as depositary receipts, and domestic brokerages like Fidelity offer trading in international stocks. However, there may be additional paperwork, regulatory, and tax considerations when taking this approach.

Real Estate

For those interested in the African real estate market, a simple way to invest is through a Real Estate Investment Trust (REIT). These pooled funds operate like mutual funds, accumulating a portfolio of income-generating rental properties and distributing any profits to investors.

The risks of investing in African stocks

Although Africa is rapidly becoming one of the newest destinations for emerging market investors, it is still a riskier prospect than more developed regions. Here are some of the key risks to consider when investing in African stocks:

Regulatory and Reporting Standards

According to the U.S. Securities and Exchange Commission, foreign companies may be subject to less stringent regulations and reporting requirements than those in the U.S. This lack of stringent regulations may also apply to other countries investing in Africa. This could impact the level of transparency and trust in the market.

Currency Risk

Foreign securities are often priced in a foreign currency, which adds an additional layer of risk for traders. Currency fluctuations can significantly impact the value of investments and the potential for profits.

Political and Economic Stability

While governance has improved in many African countries, there is still a risk of political and economic instability. This could impact the business environment and the ability of companies to operate effectively.

Lack of Research and Information

African-listed companies are generally far less researched than their counterparts in Europe and the U.S. This lack of research and information can make it more challenging to make informed investment decisions and increase the risk of unexpected developments impacting the value of investments.

Exchange Rules and Corporate Governance

There are unique challenges when tracking an index in emerging or frontier markets, such as Africa, relating to exchange rules and corporate governance. ETFs in Western countries are based on the assumption of full liquidity, which may not be the case in Africa. This could impact the ability to buy and sell securities and affect the accuracy of pricing.

Company Performance and Competitiveness

The biggest companies in African national indices are often legacy state-owned enterprises. These companies may not be able to compete effectively with private rivals and may not be well-positioned to benefit from African growth themes. Therefore, their performance and competitiveness on a global scale may be limited.

The future of Africa's economic growth

Africa is rapidly becoming one of the most attractive destinations for emerging markets investors. The continent boasts extensive natural resources, a young and increasingly educated workforce, more stability in governance, and more prospects for economic growth than in previous years.

Africa's Economic Growth

Africa's economic growth has been impressive, with an average real annual GDP growth of 5.4% between 2000 and 2010, adding $78 billion annually to GDP. However, growth slowed to 3.3%, or $69 billion per year, between 2010 and 2015 due to collapsing global commodity prices and political shocks. Despite this, the continent's economic growth story remains positive, with a projected growth of 3% in 2024 for Sub-Saharan Africa, up from 2.4% in 2023, and an acceleration to 4% in 2025-26.

Future Prospects

• Young and Growing Population: Africa has a young population with a growing labour force, expected to reach 1.1 billion by 2034. This provides a valuable asset in an ageing world.
• Urbanization: The continent is still urbanizing, and productivity in cities is three times higher than in rural areas. This trend will contribute to rapid growth in consumption by households and businesses.
• Technological Advancements: African economies are well-positioned to benefit from technological advancements, especially in mobile payments and smart phone penetration. This can unlock growth and reduce the limitations and costs of physical infrastructure.
• Infrastructure Investment: Spending on infrastructure has doubled over the past decade, and this trend is expected to continue, further supporting economic growth.
• Foreign Investment: Foreign direct investment has increased significantly, reaching $73 billion in 2014, up from $14 billion in 2004. This reflects the positive fundamentals of African economies.

Challenges and Opportunities

However, it is important to acknowledge that Africa still faces challenges in achieving sustainable economic transformation. Historical growth rates have been insufficient to offset population increases, and structural transformation has been slow, with a heavy reliance on traditional, low-productivity sectors. To address these challenges, Africa needs to focus on strategic investments in key areas such as education, energy, technology, and infrastructure. The financing gap for these investments is significant, estimated at about $402 billion annually until 2030.

In conclusion, Africa's economic growth story remains resilient and promising. With the right policies, investments, and structural reforms, the continent is poised to accelerate its growth trajectory and unlock its full potential.

Frequently asked questions