The Long Case for SPDR Emerging Middle East & Africa ETF

It is to little surprise that the SPDR Emerging Middle East & Africa ETF (GAF) receives minimal news coverage. Eclipsed by the Gibraltar-like financial strength of the emerging markets in China, Brazil, India, and Russia (and the ETFs that track them), there seems to be no room in investors' portfolios for countries with sub double-digit growth rates.

Lately, the only press coming from Africa is that of the corruption in Kenya, the Jihadi-ridden Somalia, and persistent poverty and tribalism that continuously envelops the continent. Not a problem for investors in the Emerging Middle East & Africa ETF. The fund does not fully cover the territories its title may imply. The "Emerging Middle East & Africa" ETF is heavily weighted around three countries—South Africa (65%), Israel (17%), and Egypt (6%).

South Africa has experienced steady and constant growth for several years now. GDP has increased by 4.8% in 2004, 5.1% in 2005, 5.0% in 2006, and 4.7% in 2007, with estimated growth in 2008 of 4.2%. Also, as the worlds leading gold mining country, South Africa is in excellent position to reap the benefits of $900 gold and its continual upward rise. With the FED only weeks away from the January 30th meeting, there is a high probability of a 50bp rate cut due to continuing credit market deterioration. This may lead to traders bidding down the dollar and fleeing to gold.

On the technical side, there seems to be an inverse relationship between the market price of GAF and the 10 year note yield. As the FED plans to slash the Fed Funds rate to 4% or 3.75%, the 10yr benchmark will likely follow the yield to comparable levels. As seen in the chart below (click to enlarge), the inverse relationship is apparent since the inception of the fund. Most notably, when rate cuts began in October the 10 year note yield fell and the market price of the SPDR Emerging Middle East & Africa ETF (GAF) rose.

If the past is any indication of the future then the SPDR Emerging Middle East & Africa ETF may be in for sizeable gains in 2008. Long term investors with convictions that gold futures will remain at high levels and the Fed will continue to slash rates may benefit from this crafty ETF.

Disclosure: Author has a long position in GAF

Comments

[haydete]

sorry, but where is the 10-yr vs GAF chart?

[kdwill]

Silly. If you want Israel or South Africa, use those ETFs. GAF is only 6% 'real' emerging Africa.....forget it.

[TomasBirriel]

I couldn't agree with you more. If you are looking to only invest in S. Africa or Israel your best bet is probably to use the iShares MSCI South Africa Index Fund (EZA) or the First Israel Fund (ISL). But for someone trying to diversify across the two and who is trying to keep the number of positions in their portfolio down (perhaps to reduce transaction costs or not having adequate capital to buy two solid positions), GAF doesn't seem that silly.

[ckrakoff]

This portfolio does indeed seem skewed in favor of South Africa and Israel, each of which has its own ETF. I looked at this because I want to get exposure to Egypt, and not just to the few companies like Orascom that have ADRs you can buy. But with only 6% Egypt exposure, this isn't too appealing. Another option worht checking out is the new T. Rowe Price Emerging Africa and Middle East mutual fund, which has a greater Egypt weighting and some interesting plays in Nigeria, Morocco, and other countries. South Africa and Israel are heavily weighted, given their market caps compared to other markets in the region, but not quite as much as GAF. Full disclosure: I own about $10,000 of the T Rowe Price fund,