Another Sticking Point for the South Africa ETF

ETF Trends

The iShares MSCI South Africa ETF (EZA) is off another 1.4% Monday on volume that is nearly 50% above the daily average at this writing.

Monday’s tumble is more than enough to extend EZA’s woes. Those woes have EZA sitting as not only one of the worst emerging markets ETFs to start 2014, but one of the 10 worst non-leveraged ETFs of any variety. [Emerging Markets are a Mess]

Underscoring investors’ lack of faith in emerging markets ETFs, EZA has slumped this year despite gains for the largest gold, platinum and palladium ETFs. South Africa is a major producer of those three precious metals. However, the materials sector is less than 12% of EZA’s weight, but that is enough to be a thorn in the fund’s side when labor strife comes calling as it has in recent days. [Look for Higher Platinum Prices]

Beleaguered EZA is facing problems behind South Africa’s mining sector and the weakening rand as at least one major ratings agency sees the country’s big banks as vulnerable to a sovereign downgrade.

“We don’t rate banks in South Africa above the sovereign foreign currency rating because of the direct and indirect influence that domestic economic performance has on banks’ financial performance,” Standard & Poor’s said in an email to Bloomberg. S&P cited labor strife, rising external deficits and slack economic growth for its cautious outlook on South African banks, Bloomberg reported.

Financial services stocks account for 25.2% of EZA, making the group the fund’s largest sector weight. That is more than double the weight allocated to the materials sector.

At the ETF level, South Africa’s economic woes, including unemployment north of 20% and some of the worst income inequality in the world, are not confined to affecting EZA. South Africa is a top-five country weight in the iShares MSCI Emerging Markets Minimum Volatility ETF (EEMV) and the PowerShares S&P Emerging Markets Low Volatility Portfolio (EELV).

EELV and EEMV have maintained their out-performance, albeit slight, of traditional diversified emerging markets ETFs this year, which is to say the pair have been less bad. [Some Low Volatility ETFs Were OK in 2013]

So glum is the economic outlook for South Africa that some observers think Nigeria could usurp South Africa for the title of Africa’s largest economy this year. Nigeria was Africa’s top-performing equity market last year, but the Global X Nigeria Index ETF (NGE) is off almost 7% this year.

iShares MSCI South Africa ETF

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