EZA: Resource Rich And Under The Radar (NYSEARCA:EZA)

If you are going to invest in a single-country fund, you need to scrutinize its dynamics. I’m generally a fan of international investing, especially at this point in the cycle, and like single country ETFs as a way to express that. One fund that tends to not get as much attention is the iShares MSCI South Africa ETF (NYSEARCA:EZA). It provides easy access to the equities of South Africa, a country endowed with a wealth of natural resources. The fund attempts to track the MSCI South Africa 25/50 Index. It’s not a large fund, with around $260 million in assets, but this may actually be a very good thing as it suggests there isn’t a ton of money allocated to South Africa through the fund, in turn resulting in it potentially being an undervalued international play.

A Look At The Holdings

Given the fund only has 32 holdings, it should make some sense that there is concentration risk when looking at the positions. No stock is larger than 16.09% of the fund, and the sector mix in the top 10 is fairly diverse.

What are these companies? Naspers Limited is a multinational internet and media conglomerate. In addition to running its own tech platforms, the company owns stakes in a number of technology companies. FirstRand Limited is a top financial services provider in South Africa, offering a vast array of banking, investment, and insurance products. Standard Bank is a financial services group that provides a comprehensive range of different banking, insurance and investment management services. Gold Fields Limited is, as you probably guessed, a gold mining firm. And Capitec is a retail bank. These I think are fairly good representations of South Africa’s economy overall.

Sector Composition and Weightings

As is usually the case for country ETFs, Financials are the largest allocation at nearly 40% of the fund. Materials makes up 20%, with Consumer Discretionary not far behind.

Remember that South Africa is a resource-heavy country, so the Materials weighting here I would consider one of the main benefits, particularly because I’m bullish on the commodity cycle picking up.

Peer Comparison

There aren’t any other funds that directly compare against EZA tracking South Africa. There is an Africa fund though in the VanEck Africa Index ETF (AFK). It’s not an apples to apples comparison by any means, but if we compare EZA to AFK, we find that EZA has outperformed. Again – not a strong comparison, but does provide some context around relative momentum.

Pros and Cons

On the positive side, some of South Africa’s many natural resources – gold, diamonds, large reserves of coal, oil and natural gas – make it an important supplier in global commodity markets. The growing middle class and burgeoning consumer market are further indicators of long-term economic prospects.

On the negative side, South Africa suffers from broader societal issues given its unemployment rate, the level of income inequality, the quality of infrastructure, and the possibility of political instability. Policies are always subject to change, and this can elicit investor (flight) risk, which can hit the stock market and hinder economic development. Further, there is a concentration danger – the fund is overly invested in the financials and materials sectors, either of which is susceptible to industry-specific risk and external forces, including global commodity price movements.

Conclusion

For those investors trying to get targeted exposure to the South African equity market, this ETF seems like an appealing option. The fund offers broad-based exposure to the country, with its portfolio holdings spread across numerous sectors and industries that cover much of the spectrum of South Africa’s leading firms. I like the fund as a diversifier and think it’s worth considering.

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