Diversifying Portfolios With Africa ETFs: Benefits & Risks

As a global investor, it's crucial to consider diversifying your portfolio. One way to do this is by investing in an Africa ETF. Africa is home to some of the fastest-growing economies in the world and offers a wide range of investment opportunities. In this article, we will explore the risks and benefits of diversifying your portfolio with an Africa ETF.

Benefits of Investing in an Africa ETF

Exposure to Fast-Growing Economies

Africa is home to several of the fastest-growing economies in the world, with countries such as Nigeria, South Africa, Kenya and others experiencing high economic growth rates. By investing in an Africa ETF, you can gain exposure to these economies and potentially benefit from their growth.

 

When it comes to Africa, you typically have the option of selecting investments in countries that are either frontier markets or emerging markets in Africa. Developed markets include countries with highly established stock markets and generally stable economies such as the United States, Japan and Singapore.

 

Emerging markets are countries with relatively stable economies and solid economic growth but they tend to be less stable than developed markets and there tends to be less access to African stock markets than you would find in developed markets.

 

Frontier markets are a step below emerging markets, with economies that are moving in the right direction but with not quite as much stability as emerging and developed markets. Or, in the case of Iceland, the government and economy are stable, but access to the stock markets is minimal.

 

Both Egypt and South Africa are classified as emerging markets, while countries such as Kenya, Mauritius, Morocco, Nigeria and Tunisia are classified as frontier markets. Botswana and Zimbabwe are two other nations that have attained standalone market status, which usually means these economies are being watched carefully to determine whether or not they are ready to move into frontier market status.

 

Diversification

Investing in an Africa ETF can help diversify your portfolio and reduce overall risk. By spreading your investments across multiple economies and sectors, you can reduce the impact of market volatility in any one specific market. 

 

Access to Underserved Markets

Investing in Africa ETFs can provide access to markets that are often underserved by traditional investment options. This can be a great opportunity for investors looking to tap into emerging markets and potentially reap higher returns.

 

Low Fees

Compared to actively managed funds, ETFs typically have lower management fees, making them a cost-effective way to invest. This can be especially beneficial for investors who are looking to gain exposure to African markets, as many actively managed funds focused on Africa, can have high fees.

 

Risks of Investing in an Africa ETF

Political and Economic Instability

Investing in emerging markets, including Africa, comes with its share of risks, including political and economic instability. Some African countries have a history of political unrest and economic instability, which can impact market performance and make it more difficult for investors to realize returns.

 

Currency Risk

An investment in Africa may also come with currency risk. The value of your investment may be impacted by fluctuations in the currency exchange rates between the U.S. dollar and the foreign currency. This can be especially significant in African countries where the local currency may be less stable.

 

Limited Market Liquidity

African markets can be less liquid compared to developed markets, meaning that it may be difficult to buy or sell shares at a desired price. This can make it more challenging for investors to quickly respond to market conditions or to realize returns on their investments.

 

Reliance on a Small Number of Companies

Many Africa ETFs may be heavily reliant on a small number of companies, which can increase overall risk. This is because the performance of the ETF may be heavily influenced by the performance of these few companies, rather than the overall performance of the market.

 

Socially Responsible Investments

While the name of the game might be to build your portfolio and ensure future results for retirement, another investment objective that is becoming popular is socially responsible investing (SRI). With this, investors are looking for investments (in any asset class) that adhere to specific environmental, social and governance (ESG) standards.

 

If opting for SRIs is one of your target goals, it will be important to study the listing of companies within the ETF to ensure that these companies align with your personal goals and philosophies. Of course, you should also look at the investment return and principal as well as the expense ratios.

 

Ready To Invest? Research Is Crucial

Investing in an Africa ETF can provide exposure to fast-growing economies and offer the potential for higher returns. However, it's important to consider the risks involved, including political and economic instability, currency risk, limited market liquidity, and reliance on a small number of companies. Before making an ETF investment, such as a South Africa ETF or perhaps a frontier markets ETF,  it's recommended to conduct thorough research and consider the specific risks and benefits associated with the ETF.

 

Overall, diversifying your portfolio by investing in Africa can be a great way to tap into emerging markets and potentially reap higher returns. However, it's important to approach any investment decision with caution and to thoroughly understand the risks involved. As with any investment, it's important to carefully consider your goals and risk tolerance before making a decision on any Africa ETF.

Investing In South Africa: ETFs & Other Options

Expanding your portfolio is always a good idea to consider and investing in Africa can be one option worth exploring. A South Africa ETF, for example, can be an interesting investment option for anyone seeking to expand into emerging markets or frontier markets.

Why Invest In South Africa?

While South Africa certainly faces obstacles, such as a high unemployment rate and high crime rate, there are many factors that can make investing in this country attractive to investors.

 

Despite high employment, South Africa’s economy is well-developed and the Gross Domestic Product (GDP) continues to grow every year. South Africa also has a growing middle class and with it, a thriving consumer market.

 

Compared with other African nations, South Africa has a highly skilled and well-educated workforce, and this can be attractive to multinational corporations looking to set up operations in the region. Additionally, the South African government has designed policies and initiatives to encourage investment both from domestic investors and foreign investors.

 

South Africa is rich in natural resources and is a top producer of gold and diamonds, as well as iron, uranium, silver, titanium, chromium and other much-in-demand resources. South Africa also boasts a well-developed infrastructure which can help to support continued economic growth.

 

South Africa’s government also is one of the most stable on the African continent. For all of these reasons, South Africa has been given emerging market status and is one of only two African nations listed as an emerging market, the other being Egypt, which also has a growing economy and relatively stable government.

 

In general, investors can put their money into developed markets, emerging markets or frontier markets. While no investment is without risk, developed markets tend to have the most stable economies and governments, which can help to limit risk. Still, while investing in emerging or frontier markets can be riskier, one also has the possibility of enjoying steady growth or even high yields from these investments.

 

Making an investment in Africa, in general, can be an excellent option for anyone looking for socially responsible investment (SRI) options. If you are interested in SRIs, you will want to look for options that adhere to specific environmental, social and governance (ESG) standards. An ESG investment would be one that is designed specifically for the socially conscious investor or an investor that wants to expand their portfolio to include some SRI options.

How To Invest In South Africa

With emerging markets and frontier markets, accessing stocks in individual companies is possible, but can be very difficult. So, while this is one option to consider, it’s usually easier for most investors to consider buying shares in a mutual fund or exchange-traded fund (ETF) that invests in South African businesses.

 

Both of these fund types are diversified with multiple holdings, which can reduce your overall risk and both can be purchased easily often through online brokerage firms without the need for an investment advisor. Mutual funds and ETFs often are index tracked, which means they seek to track specific market indices such as the MSCI South Africa 15/50 Index.

 

In some cases, the ETFs or mutual funds also might focus on a particular sector. For instance, you might find a mining ETF that focuses on natural resource mining and exploration. Other ETFs might focus on infrastructure or perhaps on agriculture or financial services while others might focus on a wide range of sectors in a specific country or region.

 

While both mutual funds and ETFs have their advantages and disadvantages, ETFs can be a great option for several reasons. ETFs are passively managed which means they typically have lower fees than mutual funds, which are actively managed by fund managers. ETFs are traded just like stocks, so you can buy and sell shares throughout the trading day unlike mutual funds, which have prices fixed at the end of each trading day.

 

As with any investment decision, future performance and future results are never guaranteed to be positive, so it is crucial that investors research each ETF carefully before purchasing shares.

 

Look at the historical performance data and the types of holdings and weighting of each holding within the fund. After purchasing shares, it is important to track the investment results and stay up-to-date on any news about the holdings in the fund. 

 

There are several South Africa ETF options, and investors also could consider purchasing shares in a general Africa ETF or an emerging market or frontier markets ETF that includes some investments in South Africa.

 

Of course, a South Africa ETF is not your only option. Investors also can consider options such as a real estate investment trust (REIT) that invests in South African real estate. Private equity funds are another option, and with this option, you would be providing capital to growing businesses in exchange for a stake in ownership.

 

Venture capital firms and microfinance organizations also can be an option, although these tend to take a significant amount of capital and are more difficult to access for most investors.

 

Whether you opt for a South Africa ETF or another type of investment, spend time researching each investment opportunity carefully to ensure that you are making the best decisions for your portfolio and financial goals. Be sure to head back to Money Watch Africa regularly for updates about investments throughout the African continent.