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At first blush, an ETF in exotic markets with an expense ratio of 0.59%, a p/e ratio of 9 and a dividend yield of 4.5% looks attractive. Indeed, with turnover of only 7 per annum, the SPDR S&P Emerging Middle East & Africa ETF (NYSEARCA:GAF) even appears to be well managed. Having risen from a low of USD 34.14 on the 9th March, to the current price USD 47.78, it is even performing well. Why, then, does GAF almost always appear in the most ‘shorted’ threshold securities list?

The first thing to note is that in Q1 2009, the stock has traded at a 1.59% premium to NAV. That is quite a premium for an ETF.

Still, why short for such a small gain when the long case for the Middle East and Africa is so clear. Surely, it would not be surprising if investors, seeing the strong bounce in crude prices, concluded that the oil rich Middle East is the place to be. It would also not be surprising if investors who looked at the heavily oversold markets in Kenya and Nigeria (to name but a few) decided that it would be interesting to participate in the positive economic growth in these countries.

The trouble is, as the shorts indicate, such long term investors would be making a mistake. That mistake would not, however, be in their assessment of the Middle Eastern and African markets.

The case for the Middle East is clear and bullish. Namely: strong GDP, led by centralised spending and a new managerial class. The case for Africa is equally compelling. Namely: strong population growth, the technological leap and industrialisation which are finally transforming the continent. The mistake would be to assume that the SPDR S&P Emerging Middle East & Africa ETF gives exposure to any of the themes mentioned.

Take a look at the fund in more detail. The idea of the fund is to closely match the returns performance of the S&P/Citigroup BMI Middle East & Africa Index. Sounds straightforward enough. That is, until you look into what that Index actually represents. This ETF’s largest exposure is to South Africa, at 61.05%. The only other African exposure is 7.73% to Morocco and the same for Egypt. Nigeria, Kenya and the other African champions don’t have any exposure.

Meanwhile, the representation for the Middle East is even more bizarre. The only Middle Eastern exposure is a 24.99% weighting to Israel.

In short, investors are not getting a representative index at all. They are getting a resource tilted (20.66%) fund to the two most developed markets in the universe. Surely: a combination which will hold back performance.

Disclosure: Daniel Broby holds no long or short positions in GAF. Silk Invest holds no long or short positions in GAF. Silk Invest manages two funds in the same region, the Silk Africa Lions and the Silk Arab Falcons.

Source: GAF: Barely Exposed to Emerging Middle East and Africa