The Easiest Way to Invest in Africa

Investing directly on an African stock exchange is an intimidating prospect for someone located an ocean away. It’s a scary thing to send your hard-earned dollars to an unfamiliar place, especially a place that we’ve been conditioned to see as chaotic and corrupt. When this prejudice is compounded by stacks of paperwork or unhelpful brokers, it’s clear why many investors conclude that the continent simply isn’t worth the hassle.

Fortunately, you don’t have to be a thrill-seeker to be an Africa investor. The Market Vectors Africa Index ETF (Ticker Symbol: AFK) brings some of the region’s largest stocks within reach of your online broker. I’m a fan of the fund and here’s why.

Accessibility

As an exchange-traded fund (ETF), AFK trades just like a stock. You can buy and sell it through any US broker at any time of the trading day for the same commission as a stock. You can even sell it short if you so desire. What’s more, its 0.83 expense ratio is a bargain compared to most mutual funds.

Diversification

With 13 countries represented in its portfolio, AFK is Africa’s most regionally diversified ETF. Nearly 80% of the fund’s assets are invested in companies based on the continent. The remainder of the portfolio consists of firms that conduct more than half of their business in Africa. Note that the portfolio is skewed toward South African, Egyptian, and Moroccan stocks, but it does include some token representatives of the Nigerian and Kenyan markets.

Stock selection

AFK holds some fine companies that you simply can’t buy anywhere else this side of the Atlantic.

Bank stocks comprise nearly 30% of fund assets. I like this focus. Compared to their Western counterparts, African bankers tend to be a conservative bunch. By and large, they focus on growing a deposit base and investing in treasuries. It’s not a flashy business model, but it’s a stable one.

Telecommunications companies are also well represented – garnering a nearly 10% weight. Africa’s wireless companies have been some of the world’s most innovative. They’ve pioneered services and pricing strategies that radically changed the way business is done on the continent.

To be honest, I do have misgivings about the fund’s concentration (26%) in mining stocks. The mining industry’s social and economic legacy is a troubled one in many African countries. Moreover, captive as they are to fluctuations in global commodity markets, mining firms are especially difficult to analyze.

Conclusion

While not perfect, the AFK is an excellent way for US-based investors to add some African exposure to a stock portfolio. It currently trades at a slight premium to its underlying asset value (P/NAV: 1.01) and yields 0.76%.

Further Reading

11 Africa-Focused Mutual Funds and ETFs

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