Van Eck Africa Index ETF
Africa. The name alone inspires thoughts of great adventure. Tracking elephant, watching prides of lions roam the grasslands. Some of the pictures I’ve seen are amazing. I have a few friends who’ve traveled to Africa and they all rave about a wonderful experience.
What they don’t do however is rave about investment opportunities in Africa.
That’s why I looked at a new investment product with a bit of skepticism.
Van Eck Global, a big fund manager, just launched an Africa Index ETF (AFK). It’s tracking the Dow Jones Africa Titans 50 Index, a grouping of the 50 largest companies in the region. Sounds simple enough.
But is it a good investment?
I decided to take a closer look at this opportunity. You never know what you’re going to find. Now, I’ll be the first to admit. Before starting this research I didn’t know much about Africa. I did however discover some really interesting data points.
Did you know Africa:
Accounts for 20% of the world’s landmass but only holds 15% of the population.
Despite its size, on a global basis it accounts for only 2% of economic output.
Over the last few years has been growing faster than 6% per year.
Exports mainly natural resources like oil, gas, and diamonds?
Now I know what you’re thinking. Interesting facts, but “So What?”
Here’s why you should care. Some people think Africa is the next China. It’s set to explode in growth. Investors who are early to the market stand to make lots of money. Here’s the pitch Van Eck gives (summarized of course) on why to invest in Africa.
Think about it for a moment. Then, I’ll tell you what I think.
Major changes in the African economy.
The African continent is experiencing some amazing growth. A lot of this is driven by economic and government reform. The economic growth is leading to more and more Africans escaping poverty. This allows them to buy cell phones and automobiles. Some projections have certain country’s GDP growth to be more than 9.9%. As a comparison the US grows at 2-3%, in a good year.
Energy and communications are rapidly expanding.
The largest drivers of economic growth are energy infrastructure and communications. Nigeria alone accounts for more than 36 million cellular phone users. By deploying advanced communications and energy infrastructure now, these emerging countries will leapfrog some developed nations.
Africa holds major reserves of natural resources.
Africa is also home to some incredible natural resources. Commodities are found in substantial quantities including natural gas, gold, and aluminum. They’re also a top producer of agricultural products including cotton as well as crops for the production of alternative fuels. Amazingly, 80% of their exports are natural resources.
Africa has huge amounts of oil
Right now, their most valuable natural resource is oil. With oil prices above $100 a barrel, the continent stands to benefit from cost effective extraction and refining. Nigeria hosts one of the world’s largest proven oil reserves. Other countries have started development of their oil reserves as well. Oil’s believed to be located in Angola, Sudan, and Equatorial Guinea, just to name a few.
Major trading partners are China and India
Africa’s working hard to export goods. China and India are the recipients of more than 10% of their exports. And that number is growing very rapidly. By some estimates, exports to China are rising by 40% a year. With major trading partners being the fastest growing in the world, it will no doubt spur growth on the continent.
Lastly, China’s investing heavily in Africa
China is looking to Africa as a major long term trading partner. In the last few years more than $12 billion have been invested in infrastructure development. They’re planning for another $20 billion in the next 5 years alone. It looks like China’s trying to buy the natural resource base of Africa. Especially the oil. Seems to be a smart move.
So what do you think? Sounds like an exciting opportunity. . . Right?
Wrong. I’ve got to be honest. I hate this investment.
Let me tell you why.
First off, for all the great things going on in the continent, Africa is still the Wild-Wild West. Corruption runs rampant. Just ask any major business trying to work in that geography.
The thought of law and judicial oversight’s a joke. How can you protect property rights and ensure business ventures aren’t just stolen without a well developed sense of law. It seems a bit risky to me.
That’s not all. Many of these countries are buried under huge amounts of debt. They’re living on the edge. Any hiccup in the economy might shatter their fragile economic structure. If the economy is bad, the risks to the government increase. It won’t be long before you go from economic stagnation to full scale civil war.
That’s not all. If you dig into the offering information, the Van Eck Global Africa Index ETF says it plain as day. “Social and political unrest may continue to contribute to volatility in the African marketplace.” That doesn’t sound good to me at all.
Why take on that risk?
There are hundreds of other reasons, but for me, that’s enough.
I can’t think of a worse place to put your money right now.
If you’re curious, the ETF was just started in July of 2008. According to the latest available data, they have an expense ratio of 1.2% (which is high) and they have only $5 million dollars under management (way too low). I wouldn’t be surprised to hear about this fund closing early next year.
Category: ETFs
