Will The Egypt ETF Be Crushed By More Turmoil? - ETF News And Commentary
February 06 2012 - 6:01AM
Zacks
Despite the overthrow of longtime strongman Mubarak in 2011,
Egypt remains a deeply troubled country. With the ultimate goal of
turning into a democracy, the country is currently ruled by a
military council that appears to have no intention of turning over
the state to a civilian government anytime soon. This factor has
led to sporadic protests across the country, and especially in
Cairo, but for the most part, these have been relatively muted
compared to what many had seen during the revolution. However,
recent events suggest that we could be seeing a new, ugly chapter
in Egypt’s history that could push the country back into
turmoil.
The latest events stem from a riot after a soccer match in which
a deadly riot took place, leaving 74 dead and over 1,000 hurt. Many
were enraged by the lack of security, feeling that many government
officials allowed this to happen as revenge for some of the events
that took place during the revolution. As a result, some took to
the streets in countries around the country, leading to more
protests—and deaths—in a number of cities across the nation (see
Egypt ETF: Further To Fall?).
Given the quick escalation and the underlying issue of the
country maintaining a quasi-dictatorship, some fear a return to
anarchy in Egypt. With this backdrop, investment in the country
looks to remain uncertain once again, especially if the protests
remain in the spotlight and the military government escalates the
situation further. This could push the country’s markets back into
the period that we say in 2011 when investors fled everything Egypt
related and instead focused in on safer and more stable emerging
markets for exposure. As a good proxy for sentiment on this issue,
the Market Vectors Egypt Index ETF (EGPT) looks to be an easy way
to measure mood on the country.
Egypt ETF In Focus
The Van Eck fund remains the only pure play option that
investors have to the country, although products like PMNA, AFK,
FRN, or GULF, also offer decent exposure to the nation as well.
EGPT follows a rules-based, modified cap weighted index that looks
to give investors exposure to firms that are either based in, or do
at least 50% of their revenues in the country. Currently, the fund
holds 29 securities and charges investors a net expense ratio of 94
basis points (read Africa ETFs: Three Ways To Play).
EGPT is heavily focused on financials as these securities make
up about two-fifths of the total assets in the fund, although
telecom service companies also make up a good chunk at nearly 20%
as well. Beyond these two sectors, double digit weightings are also
given to materials and industrials, suggesting that the fund has a
decent breakdown among the various sectors. Investors should also
note that EGPT has just under 10% of its assets in large cap firms,
putting the vast majority of its holdings in pint sized securities,
a factor that could increase the overall volatility of the fund
(see Three Overlooked Emerging Market ETFs).
Nevertheless, despite the tilt towards volatility, the fund has
yet to be impacted by the recent events in the country. EGPT rose
by about 3.3% last week and is still up close to 28.3% in the
year-to-date period, suggesting that the national economy may
finally be starting to get out of its slump. However, investors
should note that the fund has certainly tapered off in recent days
and another decline is certainly not out of the question. After
all, investors shouldn’t forget that EGPT crashed by nearly 53% in
2011 including a 20% drop in the first quarter of the year
alone.
Given how little market participants have discounted the
situation in Egypt, it appears as though many believe that this
issue will just cause sporadic violence and not spiral out of
control. While it is true that EGPT has sold off a little in recent
days, it barely even registers when compared to the performance of
the fund over longer time periods. So for investors concerned about
investments in EGPT, a continuation of the status quo appears to be
the name of the game, at least for the time being. Just note that
as we saw last year—and early in 2012-- perceptions in Egypt can
change quickly and that a close monitoring of positions in the
country need to take place in order to protect against the
significant volatility that can be inherent in this extremely
volatile fund (see Three Bond ETFs For A Fixed Income Bear
Market).
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