South Africa ETF: Exciting But Risky

When an exchange-traded standout gains 270% over 4 years and annualizes at nearly 36%, the investment is going to spark some excitement. Specifically, the iShares MSCI South Africa Index Fund (EZA) has flourished since the 1st quarter of 2003. In fact, South African equities have been huge beneficiaries of the worldwide thirst for natural resources.

Over 5 years, the MSCI South Africa index slips from 36% per year to annualizing at 30%. Who would scoff at 30% per year... not me! Still, when one factors in the effects of the 2000-2002 bear market, the 10-year returns are somewhat tamer; that is, the 10-year return for the index that EZA tracks is 11.72%.

Believe me when I say, it is not my purpose to rain on the South African parade. Not only is 12% annualized quite extraordinary, but EZA offers a significant overweight to the materials sector... one of my favorite segments in any economy right now.

Monique Vanek of MoneyWeb.com explains that Americans have been pouring billions of U.S. dollars into EZA. From the looks of it, not even the politically charged "Blood Diamond" starring Leo DiCaprio could deter American interest in the growth of South African stocks.

(Investors with a disdain for South African practices might log their protest by avoiding EZA shareholders like Citigroup (C) and Fidelity. Or, similarly, one might pursue the 30% per year in EZA, and use the profits to protest directly.)

Nevertheless, I do want people to understand risk. I do want investors to realize that this investment is 2.6x more volatile than the S&P 500 (SPY). I do want people to understand that jumping on the EZA bandwagon without a plan to sell could be extremely costly.

Need a bit more proof? The EZA fell 30% in value in the 7 weeks from May 9, 2006 to June 27, 2007. EZA didn't genuinely break even again until April 2nd of this year 2007. In fact, its one-year return... with 2.6x the risk of SPY is less than 10%. (Again, 30/30 hindsight may not always be what it's cracked up to be.)

Disclosure Statement: As a Registered Investment Advisor, Pacific Park Financial, Inc. may hold positions in the ETFs, mutual funds and/or index funds mentioned above.

EZA 1-yr chart:

Comments

[African guyin Kenya]

The reason why Citigroup and Fidelity are successful while you're not is because they know a bargain when they see one.