May 10, 2021

An Africa ETF: Is This The Right Investment For You?

Building a solid portfolio takes time and research, and there are so many options for investors that it can be difficult to decide which investments are the best fit for your needs. An Africa ETF is just one of the many investment opportunities to consider, and lets take a look at this option as well as other investment options.

Investors have multiple options for their portfolios. They can purchase bonds, stocks or shares in a specific company or buy mutual funds and exchange-traded funds (ETFs). With bonds, you are essentially lending money to a business that promises to pay back the money by an agreed-upon date. With stocks, you are purchasing a small portion of a company.


With mutual funds and ETFs, you are purchasing shares in several different companies, perhaps 10, 20 or more. While all investment options carry a certain amount of risk, mutual funds and ETFs are more diversified, which tends to lower your risk somewhat. This is because if one of the companies in the fund underperforms, there are still other companies in the fund that might do well and help keep the fund stable and profitable.


Mutual funds and ETFs are similar in that they are diversified, but mutual funds cannot be bought or sold during the trading day. A customer must wait until the market has closed in order to buy or sell shares. An ETF can be bought or sold at any time when the market, such as the New York Stock Exchange, is open.


An Africa ETF is an exchange-traded fund that focuses on countries throughout the continent of Africa. Some Africa ETFs focus on a specific country, such as a South Africa ETF, while others might focus on a specific industry and include investments from multiple countries, such as those involved in agriculture, mining or telecommunications.


There are more than 50 nations in Africa, and most of these nations are classified as either emerging markets or frontier markets. Developed markets include countries such as the United States, Japan, the United Kingdom, Australia and Hong Kong. These are nations with a long investment history and highly stable currencies and economies.


Emerging markets are countries that, as the name suggests, are moving toward becoming more developed markets. South Africa and Egypt are two nations that are classified as emerging markets in Africa. Frontier markets are countries that are just starting to develop markets and stronger economies, such as Kenya, Ghana, Nigeria, Tanzania and many others.


Some people associate emerging markets and frontier with instability, but thats not always the whole picture. In some cases, it simply means that investors have only had access to investments in these countries for a short time. For instance, Iceland is considered a frontier market, though it has one of the highest standards of living in the world.


With an Africa ETF, you will be investing in countries classified as emerging markets or frontier markets and, in some cases, in countries that are not yet classified by the three top indexers MSCI, FTSE and S&P.


You might be wondering if its best to invest in developed markets rather than put your money into an ETF with holdings in emerging or frontier markets. Despite their developed economies, investments in developed markets are not always a sure thing and a solid return on investment isnt guaranteed.


Investing in emerging and frontier markets can be riskier, but with an Africa ETF, the fund is diversified, which limits your risk somewhat. Though all investments carry risk, yield or return on investment can be attractive with an Africa ETF and there are many solid reasons to consider investing in Africa.


Africa is a continent rich with natural resources, including oil, gold, iron, cobalt and platinum and the demand for these resources is high. Africas growth also is driven by its demographics. The average age on the continent is just 21, where developed countries have an average age of 45. This means this younger population will fuel the demand for goods and services rather than the health care, social security and other entitlements needed by the older populations in developed countries.


Additionally, the valuations in Africa are attractive. Compared to developed markets and other emerging markets, Africa markets and stocks tend to trade at lower multiples, are less liquid and have lower coverage by Wall Street analysts. In addition, companies in Africa and households in Africa have lower debt levels. The countries have better fiscal balances and economies have low leverage.


Of course, the high, risk-adjusted returns are perhaps the most compelling reason to consider investing in Africa. There is a large information deficit about the performance and opportunity in African markets. While there has been evidence of high returns, there has thus far been relatively little investment, even after adjusting for risk premiums.


Another reason to consider an Africa ETF or any type of frontier market investment is the social responsibility factor. While everyone invests with the intent to make money and secure their future, many people these days also are interested in socially responsible investments (SRIs).


This type of investor is interested in making a profit, but also about generating positive social or environmental change. Examples of SRIs might include investing in clean energy or clean water. When it comes to an Africa ETF or any type of Africa investing, these investments can help boost the economy of a frontier or emerging market.


When looking at different Africa ETFs, several factors can determine if its the right investment for you. For instance, take a look at the top holdings and do a bit of research about each company, especially those with the highest percentage of net assets.


Take a look at the country weightings, as well. You probably will notice that some of the companies are not African, but rather American or Chinese or perhaps from a country in Europe. While this isnt necessarily positive or negative, some investors feel strongly about investing in Africa funds where the country weightings are more heavily based in African nations.


You also can take a look at the sector weightings. In some cases, this could be heavily diversified into many industries, including financials, health care, materials, real estate and so forth. With some ETFs, the sector weighting might be less diversified, which might increase risk, but also could lead to higher yields if that industry is booming.


In general, no matter what stocks, bonds and funds you choose, its best to have a diversified portfolio with many types of investments. You might select a few ETFs from developed nations, some bond funds, some stocks and perhaps an Africa ETF or a general emerging markets ETF. To learn more about Africa ETFs and other investment opportunities in Africa, sign up for our free newsletter today.

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