Friday, November 16, 2012

Africa Index ETF Presents Unique Opportunity

The Africa Index ETF that Market Vectors sponsors (AFK), has been a shining example of how diversifying assets outside of domestic US markets can be quite profitable. Unfortunately, Africa is usually at that center of negative press generated by biased western media. But, sticking to true capitalist form, you cannot refute the percentage gains this ETF has produced in the 2009 year. AFK produced 35% in 2009 vs. a mere 26% for SPY.

Beta Analysis

Beta measures a stock’s volatility (price fluctuations), in relationship to the overall market. Typically, if a security has a Beta of 1, its price movements will tend to mirror the price movement in the overall equities market. If the Beta is greater then 1, it usually means that security is experiencing greater price movements then the overall market. Conversely, a security with Beta less then 1 tends to experience lower price movements then the over market.

Beta is used as a key tool when examining Risk/Reward scenarios with securities. For example, if the overall market returned 26% with a Beta of .99 and another security with a Beta of 1.04, we would expect that security to have a gain of 27.3% or greater.

In the case of SPY and AFK, SPY actually does have a Beta of .99 and AFK actually does have a Beta of 1.04, but the difference is that AFK returned 35%, 7.7% above the expected Beta adjusted rate of return of 27.3%. That is very impressive for the Market Vectors ETF, because it produced returns that would be equivalent to a security with a Beta of 1.35, which would be, expected to have higher price movement.

This ETF has been steadily gaining ground in this game of asset gathering. For the 2009 year AFK accumulated a little shy of $32mm in new assets, which is 700% asset grow YoY. This is clearly not a new Pimco ETF offering that have gained lots of traction, but it is far from a MacroShares Metro Housing Up (UMM) /Metro Housing Down (DMM) ETFs, which were recently shut down..

As the world recovers from the deep wounds left by the credit crisis, this ETF presents a unique opportunity for investors seeking international investment exposure. This makes room for more so-called exotic investments, such as AFK.

Africa is the Last Frontier:The Chinese have recognized this, as evidenced by their significant investment into harvesting one of Africa’s greatest assets, its natural resources. The question is will China be the only one to capitalize from it.

Disclosure: No Positions

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