Good Time to Bet on Egypt ETF
The Market Vectors Egypt Index ETF(EGPT) sank Monday on concerns about Egyptian President Hosni Mubarak’s health, but the carnage may provide a good entry point for investors with a tolerance for risk.
Egypt’s government previously announced that it would increase efforts to attract foreign direct investment as part of a plan to revive the robust economic expansion the country enjoyed before the global financial crisis.
In 2008, the Egyptian economy grew 7.2% — a third straight year of 7%-plus growth. However, as the global slowdown took its toll, Egypt’s growth fell to 4.9% in 2009. Considering that many countries had negative GDP growth in 2009, Egypt’s performance during the global recession wasn’t bad, but the nation is still eager to reaccelerate its economy.
The government reportedly is targeting a 5% pace of growth in 2010 and a 6% rate in 2011. Officials think that this can be achieved through foreign direct investment, which was the policy direction the country followed in the prerecession years.
EGPT, which is the only way for ETF investors to bet solely on Egyptian markets, began trading on Feb. 18. It typically trades about 5,000 shares per day, but on sessions like Monday’s, when the fund lost 6.5%, as many as 25,000 shares can change hands.
Such average volume represents less than ideal liquidity, so I would recommend that investors take only small positions in EGPT.
The fund provides exposure to 29 Egyptian companies and has a net expense ratio of 0.94%.
The ETF devotes 64% of its net assets to its top 10 holdings. With a 9.1% allocation, Commercial International Bank is the largest holding. This is fitting since the most heavily weighted sector in the fund is financials, which accounts for 42.2%.
The second most prominent sector in EGPT is telecommunications services, which accounts for 17.3%. Next largest in terms of sector weighting are industrials and materials, which account for 15.9%, and 14.2%, respectively.
EGPT has underperformed the major U.S. indices since its inception and is down by about 7% since it was launched. The ETF has also underperformed WisdomTree Middle East Dividend Fund(GULF), a regional ETF with an 18.6% allocation in Egypt.
Another regional ETF for the Middle East, SPDR S&P Emerging Middle East & Africa ETF(GAF), allocates 5.1% of its holdings to Egypt, and this fund also has outperformed EGPT.
The final ETF that focuses on the Middle Eastern region, Market Vectors Gulf States Index(MES), does not allocate any portion of its holdings to Egyptian companies and has outperformed EGPT and GULF.
It would appear from this quick comparison that Egypt has been a laggard among the Middle Eastern countries.
This can be explained by political uncertainty, as Egyptian markets have dipped recently on concerns about the 81-year-old President Mubarak’s health. He had gallbladder surgery on March 6, and his post-surgery recovery is going well in Germany. If his condition continues to improve, the fund could make up for lost ground.
As is sometimes the case with lagging funds, this one may turn into an outperformer when the element of uncertainty that has been weighing it down is removed. That would make it an interesting short-term play for risk-tolerant investors.
The fund should also improve in the long run, if the government can deliver on its growth promises.
