As the fourth-largest producer of gold in the world, the fortunes of the South African economy are often viewed as hitched to the performance of the yellow metal itself. When it comes to ETFs, the correlations between gold and South African equities are not always as intimate as some investors think.
For example, in the past month, the iShares MSCI South Africa Index Fund (NYSE:EZA) has slumped 0.7 percent while the SPDR Gold Shares (NYSE:GLD) is higher by 0.2 percent. That indicates that EZA does not always move in lockstep with gold futures.
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Nor is EZA a lock to respond favorably when production of gold, platinum and palladium declines. That much was affirmed earlier this year when, even though platinum and palladium futures surged amid labor unrest in South Africa, EZA did not. South Africa is the world's largest platinum producer and the second-largest palladium producer behind Russia.
One obvious reason for the EZA's recent turbulence is its exposure to mining equities. The ETF devotes 18 percent of its weight to the materials sector and several marquee gold and silver miners appear among the fund's top-10 holdings.
"Appearing among the top ten weightings in the fund are names including Anglogold Ashanti Limited, Impala Platinum Holdings, and Gold Fields Ltd. There are currently 52 individual equity names represented in the underlying basket of EZA," said Street One Financial Vice President Paul Weisbruch in a note published today.
While the exposure to mining names has been a drag on EZA, it is worth noting the fund has sharply outperformed mining ETFs in the past month. Over that time, the Market Vectors Gold Miners ETF (NYSE:GDX) and the Global X Silver Miners ETF (NYSE:SIL) have plunged 7.46 percent and eight percent, respectively. Year-to-date, GDX is off nearly eight percent while EZA has jumped 6.2 percent. Still, EZA has lagged the broader emerging markets universe as measured by the iShares MSCI Emerging Markets Index Fund (NYSE:EEM).
"Year to date, EZA has lagged the broader MSCI Emerging Markets Index, up 5.46% versus the benchmark rallying 8.03% during the same time period. However, EZA has provided a relative safe haven in the context of Emerging Markets countries in the trailing five year period, as the ETF is down only 7.70% versus the MSCI Emerging Markets Index losing 16.48% during this time frame," said Weisbruch.
With regards to EZA, there is an easily defined bull/bear case for the fund and South Africa at large. The country is Africa's largest economy and the continent is viewed by many foreign investors as the last great untapped investment frontier. For its part, EZA is diverse at the sector level as financials account for a larger percentage of the ETF's weight than do materials names. Consumer discretionary stocks are just behind materials in the pecking order and telecommunications names receive an allocation north of 13 percent.
The bear case revolves around the adverse impact labor strife can have and has had on the rand, South Africa's currency. Last month, Standard & Poor's paring South Africa's credit rating by one notch to BBB with a negative outlook as labor tensions in South Africa. Speaking of labor woes, South Africa's unemployment rate of over 20 percent cannot be ignored, either.
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