Index investing sure is popular these days. You’ve got your small-cap indexes. Your large-cap indexes. Growth indexes. Value indexes. Country indexes. Bond indexes. Any slight affinity among a group of securities seemingly results in some sort of new index ETF.
It’s got me feeling a little bit left out.
So, today I’m launching the Investing In Africa Index.
Why A New Africa Index?
Numerous African indexes already exist. Do we really need another?
Yes. Because apart from the Market Vectors Africa ETF (AFK), the S&P Emerging Middle East & Africa (GAF), and the MSCI South Africa Index (EZA), no other African equity indexes are accessible to small, retail investors like me.
Moreover, the existing index funds tend to be heavily focused on mining stocks, which I just really don’t like very much.
There is a gap in the market for an index that focuses on the growth of the African middle class — not on the fortunes of foreign mining firms.
Here’s the criteria for inclusion in the index.
- Headquartered in Sub-Saharan Africa – The IIA Index is comprised solely of companies based in Africa. Why? Companies that call Africa home tend to employ more local people and to re-invest profits within the region.
- Trades on a US stock exchange – The Index will include only companies that trade on the NYSE, Nasdaq, or on the OTC Board. This is because it is intended to be easily replicable by US investors. All index constituents must be available for trade through a U.S. discount broker like ETrade or Schwab.
- Average daily trade volume exceeds $100,000 over past three months – This limits the index to only the most liquid of African ADRs and shares. Small investors should have no problem buying or selling immediately at market price.
- No mining or energy stocks – There are lots of African mining ADRs out there, but in my view, mining companies have not done a great job of sharing the industry’s benefits equitably. The Investing In Africa Index will focus on the rise of the African consumer, not the amount of ore dug up from under the continent’s surface.
Any stock that meets all four of these criteria as of the last trading day of the year will be added to the index. Conversely, any index constituents that fail to measure up will be removed.
What Companies Comprise the IIA Index?
After applying the above criteria, we were left with the nine stocks below.
[table id=24 /]
As you can see, the index is currently over-exposed to the Rainbow Nation. My hope is that, as time goes by, ADRs from other sub-Saharan countries will meet the index’s inclusion criteria.
How Is Index Performance Calculated?
This is an unweighted index. All members of the index carry an equal weight no matter what size they are or what their share price is.
Thus, the index’s performance is calculated as though an equal amount was invested in each member of the index. It is an average of the percentage return of all member stocks.
How Has the Index Performed So Far?
The Investing In Africa Index has already put up some very impressive numbers since the beginning of the year. Here’s how it measures up to the S&P500 and the big Africa-focused ETFs.
[table id=25 /]
Not too shabby, eh?
What Do You Think?
Is this index useful as a way to track the performance of easily accessible African stocks? What are your thoughts on mining stocks? Do they merit inclusion in the index? Let us know your thoughts in the comments!
[Disclosure: I am long on UEPS, AFK, GAF, and EZA.]
4 thoughts on “The Investing In Africa Index: Tracking Africa’s Most Accessible Stocks”
Nice work but with any investment, Risk Reward ratio is to a big extent what drives any investment consideration. As you readily admit, the index is currently over-exposed to the Rainbow Nation. This in itself is a flaw in your index and perhaps you will need to toy with other variables to include other countries. 47 Countries, I would readily count at least 10 with great investment prospects.
You’re correct, John. The index is entirely too concentrated in South Africa. But the index tracks only African securities that are traded in the United States, and, unfortunately, no stocks from other African countries currently trade there. My hope is that we will see ADRs from Nigeria or Kenya soon on this side of the Atlantic soon. When they become available, they will be added to the index.
Why should African shares be traded in a Bilderberg-ruled country like the US? I hope they’ll stay away from USD as this currency’s intrinsic value is zero. Let some South African banks create some ETFs or index trackers on Ghana, Kenya, Nigeria etc. so that they can control the money flows. I would never invest in a US-listed product, sorry.
Hi John, thanks for the insight. This is particularly useful for young Africans like myself looking into investing in local companies. May I please, have your email address? Thanks.