EZA vs S&P 500: March 2003 – April 2018
Source: https://www.portfoliovisualizer.com/
Have you considered investing in South African equities? More specifically, I’m referring to the iShares MSCI South Africa ETF (EZA). If so, you’ll want to know a thing or two about volatility and emerging markets. First, look at the chart above and note the blue oval around the number beneath the column labeled ‘Stdev’. This is the Standard Deviation and it is a mathematical representation of the volatility of the fund. This article will not be a lesson on standard deviation, but I do want to point to the fact that the standard deviation of EZA is nearly double that of an S&P 500 index fund. This means that with any potential reward that you might expect from EZA, you will also be accepting potentially double the volatility of a basic S&P 500 index fund. This risk/reward ratio is similar with nearly all single country emerging market funds and broad emerging market funds. This higher risk/reward ratio is sometimes called a premium. If your investment is successful, it is said that you are being paid a premium for the extra risk that you accepted. For more information on standard deviation, I highly recommend this article from Investopedia: Standard Deviation. Next, let’s look at how EZA has performed versus some broad emerging market funds.
EZA vs ADRE vs EEM vs S&P 500: May 2003 – April 2018
Source: https://www.portfoliovisualizer.com/
As you can see in the chart above, EZA has performed no better or worse than the two oldest broad emerging market ETFs. In fact, all 3 funds have had very similar ups & downs. This should lead to the question, ‘Why bother with EZA at all when you could simply own a broad emerging market fund?’ Great question, I’m glad you asked. For me, the reason I bother with single country funds is the correlation number inside the blue oval at the top right side of the chart. The lower the correlation, the more opportunities there were to buy this ETF when it was doing poorly, and U.S. equities were doing well. For me, it is far easier to take advantage of arbitrage opportunities with single country ETFs than it is with broad market ETFs. It is not my intent to deter investors from purchasing broad market ETFs; I own several; I am simply giving my reason to own a single country ETF.
Who should consider owning EZA in their investment portfolio?
– Short-term traders who confidently manage portfolio risks
– Long-term investors with a strong stomach for volatility
– Long-term investors who seek to potentially add Alpha to their portfolio
– Long-term investors who are in the accumulation phase of their investing careers
Who should NOT consider owning EZA in their investment portfolio?
– Brand new investors
– Investors who have not yet experienced a >50% drop in the value of an investment they own
– Investors with short-term savings goals
– Investors who do not like too much volatility in their portfolio
– Investors who make investment decisions based on good or bad feelings they may have when they listen to good or bad financial news
– Investors who want very simple portfolios
– Investors who don’t understand the risks involved with emerging market funds or single country funds
Now, let’s consider what you get when you invest in EZA. According to iShares’ website, the iShares MSCI South Africa ETF seeks to track the investment results of an index composed of South African equities. 1. Exposure to large and mid-sized companies in South Africa. 2. Targeted access to the South African stock market. 3. Use to express a single country view.
Key Facts:
– Expense Ratio: 0.58%
– Average volume: 436k shares/day
– Inception date: February 3, 2003
– Number of holdings: 53
– P/E Ratio: 16.18
– P/B Ratio: 2.31
– Yield: 1.72%
Top 10 Holdings:
Ticker Name Sector Weight (%)
NPN NASPERS LIMITED N LTD Consumer Discretionary 23.19
SBK STANDARD BANK GROUP Financials 6.15
SOL SASOL LTD Materials 6.12
FSR FIRSTRAND LTD Financials 4.75
MTN MTN GROUP LTD Telecommunications 4.49
BGA BARCLAYS AFRICA GROUP Financials 2.66
REM REMGRO LTD Financials 2.66
SLM SANLAM LIMITED LTD Financials 2.55
SHP SHOPRITE HOLDINGS LTD Consumer Staples 2.46
APN ASPEN PHARMACARE LTD Health Care 2.29
In conclusion, it is my contention that the high-risk/high-reward ratio of the iShares MSCI South Africa ETF (EZA) is worth considering for a long-term investor’s equity portfolio. Those who understand how to harness volatility should expect a premium for the additional risk inherent with holding single country or emerging market funds. If you do not expect a premium for the additional risks of an investment, you should not invest in it. Personally, I expect a premium while holding EZA in my portfolio.
Thank you for reading this article. If you found it useful, please share it with a friend.
Respectfully yours, Micah McDonald, aka the Deep Value ETF Accumulator
Disclosure: We currently own shares of EZA and intend to purchase more shares in the future. I am not a Registered Investment Advisor. Please perform you own due diligence or seek the advice of a professional advisor before investing in any security mentioned in this article.