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In recent years, an interesting shift in the investing landscape has taken place. Burdened with high unemployment, consistently low growth, and unpredictable government interventions, the world’s advanced economies have lagged far behind developing economies. That has caused many investors to rethink (and increase) the allocation they make to emerging markets [see this Q&A With Richard Kang for more on this topic].

Historically, most investors establishing emerging markets exposure have focused on the BRIC economies of Brazil, Russia, India, and China. But the rise of the ETF industry has enabled some investors to go off the beaten path. In recent years, countries ranging from Peru to Poland have been opened up by ETFs allowing investors to take geographic diversification to new heights. Also included in this list is Egypt, a $450 billion economy and one of the 20 largest countries in the world in terms of population. For investors looking for intriguing options in emerging markets, we offer a glimpse into the Egyptian economy and the ETF that offers U.S. investors exposure to this relatively unknown economy.

Egypt’s Economy

While most everyone is familiar with ancient Egypt, few know anything about the modern country, which is the most populous nation in Africa and the Arab World. The country used to have a highly centralized economy, but has moved rapidly towards privatization over the past twenty years. While Egypt did not experience robust levels of economic growth during this period, the inflation rate, which was well over 20% at the start of 90’s, has been halved, giving increased confidence in the Egyptian economy and boosting foreign investment.

Additionally, Egypt has a very young population–the average age is just 24–suggesting that the country could boom as its population reaches its peak earnings years. Egypt also finds itself in a key location for global trade; as much as 8% of world shipping traffic is said to pass through the state owned Suez Canal, ensuring that the country will remain at the center of the global trade scene for the foreseeable future.

Egypt’s economy is much more diversified than many in the region; the energy sector makes up only about 15% of the country’s GDP, compared to as much as 50% for oil rich states. Moreover, Egypt isn’t burdened by a “boom or bust” real estate market, a concern for many Middle East markets in the current environment. In addition to a strong financial sector, tourism, agriculture, and industrials account for significant portions of GDP.

Like any frontier markets, there are significant hurdles to overcome within Egypt. Although the country is expected to grow at about 5% this year, inflation is approaching 12% and the country’s debt is around 80% of GDP. That number is actually down considerable from 2008, but is nevertheless a lingering concern. Furthermore, the rigid political structure is a major red flag to some investors; current President Mohamed Hosni Mubarak has led the country since 1981, and the government recently found itself at the center of an international controversy related to a blockade of Gaza. The political structure, coupled with an increasing strain on the nation’s limited resources, has the potential to lead to unrest.

Egypt ETF Under The Microscope

For investors seeking exposure to the Egyptian market, perhaps the best pure play option is the Egypt Index ETF (NYSEARCA:EGPT). This relatively new fund from Van Eck tracks the Market Vectors Egypt Index, a benchmark that provides exposure to publicly traded companies that are domiciled and primarily listed on an exchange in Egypt or that generate at least 50% of their revenues in Egypt. Cairo has emerged as one of the financial capitals of the Arab world, a development that is reflected in the sector breakdown of EGPT; financials account for more than 40% of assets, with industrial materials (30%), and telecommunications (17%) also making up big chunks. Unlike many emerging markets ETFs, EGPT offers isn’t dominated by mega-cap equities, as mid caps make up a big chunk of assets offering further diversification for many investors.

The top individual holdings include Orascom Telecom Holdings (8.5%), which has operations in markets throughout the Middle East, Orascom Construction (8.3%), a major cement producer in the region, and Commercial International Bank (7.6%), the largest private sector lender in the country.

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Disclosure: No positions at time of writing.

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