- This single-country emerging market fund has compounded at 9.38%/year over the last 16 years
- EZA has a low correlation coefficient to U.S. Markets of 0.65
- Emerging markets are volatile. EZA is even more volatile than diversified emerging market funds
- EZA, a prime example for the “No Pain, No Premium” theory
- EZA has a current 12-month trailing yield of 3.67%
EZA vs S&P 500 index fund: March 2003 – March 2019
Source: https://www.portfoliovisualizer.com/
EZA vs SPY: February 7, 2003 – April 14, 2019
Source: https://www.koyfin.com/home
The iShares MSCI South Africa ETF (EZA) has been available for 16 years (February 3, 2003). In those 16 years, EZA has compounded at 9.38% per year. Although this single-country ETF has slightly underperformed a typical S&P 500 index fund, it has the advantage of low correlation to U.S. Markets. This, to me, is the root of diversification in an equity portfolio. Investors who have multiple funds in their equity holdings should look for two key essentials, long-term performance and low correlation to the other assets in the portfolio. EZA has performed well over that last 16 years and its’ correlation to U.S. Markets has been relatively low at just 0.65. This low correlation and performance came with a price though; the price investors paid was volatility.
EZA has been nearly twice as volatile as an S&P 500 index fund. For some investors, this is intolerable. But, for those of us who can stomach such volatility, we expect a premium to be paid for enduring such a wild ride in our investments. EZA has paid that premium with a 9.38% CAGR. The inherent volatility of this fund lends itself to frequent arbitrage opportunities between other assets inside an equity portfolio. Investors seeking less volatility or who do not like the risk of single-country funds should consider a diversified emerging market fund such as EEM or DEM.
In the article “No Pain, No Premium”, author Corey Hoffstein explains in depth the relationships between pain and premium for long-term investors. My favorite quote from that article is: “Therefore, we should seek to eliminate uncompensated risks while diversifying across compensated ones.” It is my contention that long-term investors in EZA will eventually be compensated for the high volatility of this fund.
For investors seeking a higher dividend in this yield starved environment, EZA currently sports a 3.67% 12-month trailing yield. I am not a dividend investor, but I sure do like it when the dividend payments roll in when I’ve been holding a position in something so volatile as EZA. I prefer to look at total-returns when considering a long-term investment. Fortunately, EZA pays a nice dividend and has good long-term total returns. Potential investors should be aware that nearly 40% of all returns in EZA come from its’ dividend payments. This is the reason I would not recommend EZA to short-term investors. Investors should consider owning EZA for at least 5 years or more to receive the expected premium of this volatile fund.
Let’s move on to the objectives and key facts about the iShares MSCI South Africa ETF (EZA). The following information is taken directly from the iShares website, on 4/14/19:
- The iShares MSCI South Africa ETF seeks to track the investment results of an index composed of South African equities. Exposure to large and mid-sized companies in South Africa. Targeted access to the South African stock market. Use to express a single country view.
- Net Assets: $533M
- Inception Date: February 3, 2003
- Benchmark: MSCI South Africa 25/50 Index
- Number of Holdings: 50
- Average Volume (20 days): 1.2M/shares per day
- Price/Earnings: 11.99
- Price/Book: 2.13
- 12m Trailing Yield: 3.67%
- Expense Ratio: 0.59%
EZA TOP 10 HOLDINGS:
EZA SECTOR WEIGHTING:
For investors looking for a low correlation asset to add to their equity holdings, the iShares MSCI South Africa ETF (EZA) may be good opportunity. This ETF has performed well over the last 16 years with relatively low correlation to U.S. Markets. It also provides a nice dividend of 3.67% while you wait for capital appreciation. EZA is currently selling for 19% below its’ 52-week high price. As a long-term investor, I’m not in the business of market-timing, but now seems as good an opportunity to buy shares of this fund as any. Investors who are not comfortable with high volatility or single-country funds should consider a diversified emerging market fund instead.
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 professional investment advisor. Please perform you own due diligence or seek the advice of Registered Investment Advisor before investing in any security mentioned in this article.
Previous Deep Value ETF Accumulator article on the iShares MSCI South Africa ETF (EZA): MAY 29, 2018 BY MICAH MCDONALD Is The South Africa ETF Worth The Risk? (EZA) 1.1