A Play on Gold and Africa's Growth

09/14/2009 1:00 pm EST

Focus: ETFS

Carlton Delfeld

Editor, The La Jolla Letter and Pacific Gains

Carlton Delfeld, editor of Chartwell Global ETF Letter, says ETFs covering South Africa’s stock market and its currency give a double-barreled exposure to Africa and gold.

South Africa, surrounded on three sides by water, is a major logistical trading center for oil and other resources and home to aggressive and sophisticated multinationals that are seeking opportunities throughout the continent.

South Africa is home to ports through which OPEC oil is transported to the US and also through which African oil is transported to China and India. South Africa is geographically and strategically placed to mine and transport the world’s most precious commodities.

Commonly thought of a gold play, mining is big business in South Africa and therefore it is no surprise that materials production is leading the recovery. Materials, in fact, account for the largest portion (27.53%) of the iShares MSCI South Africa Index Fund (NYSEArca: EZA).

The second largest portion (24.54%) of EZA’s holdings might surprise you—financials. As strange as it may seem for an emerging market, South Africa’s banking industry is one of the worlds most stable. Even as banks across the world were crumbling, South Africa’s banks barely experienced so much as a hiccup.

EZA has good momentum and has posted a total [return of 47% so far this year.] It can be volatile, with the top ten holdings of EZA accounting for 62% of its assets. Its currency is strong even as South Africa’s Reserve Bank has lowered interest rates to an all-time low. Since March, the South African rand has surged 36% against the US dollar as its deficit shrank to a four-year low of 4.3% of GDP in the second quarter.

In addition, political risk has receded somewhat, though unemployment remains stubbornly high and crime in urban areas at unacceptable levels. Perhaps this is why the WisdomTree Dreyfus South African Rand Fund (NYSEArca: SZR) has enjoyed consistent growth since its inception.

This currency ETF is slightly less volatile than EZA, yet still boasts amicable growth patterns, making it a welcomed long-term holding. The year-to-date total return on NAV is [over 20%, and the] share price is [up] 32%—not as large as EZA’s returns, but still plenty of room for growth. Another currency ETF with some exposure to the rand is WisdomTree's newest currency ETF, WisdomTree Dreyfus Emerging Currency Fund (NYSEArca: CEW), which has done well so far.

With gold performing better, technical factors pointing to good prospects going forward and many using gold ETFs as a hedge against global financial instability, EZA will get attention as an indirect play on this sector. It is also perhaps the best way to play the ample economic opportunities on the African continent.

The risk factor is high and EZA can be volatile. [We suggest taking a] small position and [putting in a] trailing 6% stop loss. (Both EZA and SZR are near their 52-week highs—Editor.)

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