Planning on investing in Africa while avoiding South African equities? You’re in luck. The AMI Big 50 ex-SA ETF, offered by South African-based boutique Cloud Atlas Investing, will be launching on April 20th 2017 with the intention of investing across Africa while excluding South Africa.

Key Features

The ETF comprises of 50 companies across Africa while shunning those from South Africa. According to Cloud Atlas, the ETF will “track the Cloud Atlas AMI Big50 ex-SA Index (beta+), which is an enhanced index designed to maximise sector and country exposure”.

The largest constituent exchanges in the ETF are Morocco (30.01%), Egypt (19.73%), Nigeria (13.02%), Kenya (9.90%) and BRVM (West African countries) (6.06%). This means that the top 5 exchanges make up over three-quarters of the index with the figure standing at 78.72%. The ETF also invests in Mauritius, Zimbabwe, Tunisia, Botswana, Namibia, Ghana and Uganda. The exchanges in the top 5 also make up 66% of the total number of holders in the fund (33 out of 50).

In terms of largest companies in the ETF, Morocco’s Marco Telecom makes up 17%, followed by Commercial International Bank (Egypt, 12.91%), Guaranty Trust Bank (Nigeria, 5.89%), Lafarge Ciments (Morocco, 5.45%) and Safaricom (Kenya, 4.45%). The top 5 largest companies make up just under half of the total ETF (45.7%). Moroccan equities feature the most in the top 10 (3 times).

Heavy allocations can be found in the Banking and Telecommunication sectors, which respectfully comprise of 31.46% and 24.76% of the ETF. Food & Beverage (18.45%) and Industrials (14.87%) also enjoy a relatively significant weighting in the fund. Oil & Gas (2.8%), Real Estate (2.71%), Utilities (1.99%), Retail (1.12%), Healthcare (0.65%, Mining (0.6%) and Insurance (0.58%) complete the sector breakdown.

Simulated historical performance (which is not an indicator of future performance) shows that the ETF would have returned 109% over a 5 year period, compared to 35% from the FTSE JSE Africa Top 30 ex-SA and 3% from CPI+4% (South African inflation). The total expense ratio is 1.1%, derived from a 0.6% management fee, 0.37% custody fee and 0.13% from other fees.

The ETF is currently subject to an initial public offering (IPO) on South Africa’s Johannesburg Stock Exchange (JSE). Cloud Atlas have highlighted the benefits of participating in the IPO:

1. No brokerage costs and created units will be allocated at NAV (no spreads).

2. A stronger Rand allows the ETF to buy more stocks on the African continent, giving you more value.

3. Safe trading environment as the ETF will be listed on the worlds best regulated exchange, the JSE.

4. There is liquidity available for both small and large sum investment amounts.

5. Participating in the IPO allows investors to trade in baskets of shares they own on the rest of the African continent for ETF units.

6. You will be an early adopter of the ETF, the first to invest in Africa in this manner and as demand picks up the demand for your initial units will increase.

7. You can invest any amount, after the IPO, outside of secondary market trading, ETF baskets will trade in minimum sizes of ZAR 25-30 million and upper limits of ZAR 100 million.

8. You are automatically invited to the listing event. 

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Cloud Atlas are also planning on launching two other ETFs at the end of June: the AMI Consumer ex-SA ETF and the AMI Real Estate ex-SA ETF.

Are there any other ETFs that exclude South Africa?

While indexes that exclude South Africa exist, such as the MSCI Emerging Frontier Markets Africa ex-SA Index and S&P All Africa ex-SA Index, there doesn’t seem to be many trackers.

The RBS Market Access MSCI Emerging and Frontier Africa ex-SA Index UCITS ETF was launched in September 2011 and used to be one of the major ETFs that veered away from South African equities, but was delisted in June 2016. The ETF suffered three consecutive years of declines (-2.72%, -16.78% and -25.22% in 2014, 2015 and 2016 respectively) and returned a lackluster -37.12% over a three year period, ultimately contributing to its inevitable liquidation.

Who is this suitable ETF for?

Like many ETFs that exclude a specific country, region or sector, The AMI Big50 ex-SA ETF will appeal to investors who want complete control of their exposure to South Africa and/or want to invest in African equities, which is difficult due to the lack of ETFs for some countries in the region, as well as country-specific liquidity and policy issues.

This isn’t be the only ETF in the pipeline that excludes a major Emerging Market as BlackRock filed with the SEC to launch a new ETF that offers no direct exposure to Chinese equities.

South Africa is currently facing a myriad of problems, both political and economic. Global ratings agency Standard and Poor (S&P) recently cut the country’s credit rating to “junk” status, citing government debt and a recent political upheaval as reasons for the downgrade. As a result, it will be more difficult for South Africa to obtain credit on international markets as it now bears a greater risk for creditors.

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