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ETF Specialist

Look to Africa for Faster Growth

For emerging-markets investors, Africa is high-risk but has good growth potential.

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The top holdings of  iShares MSCI South Africa Index (EZA) are primarily well-run financial services, telecom, and consumer firms, many of which have operations across different African markets. As such, this exchange-traded fund can be used to gain exposure to healthy growth trends on the African continent. It is one of only a few funds to focus on this region. This ETF can also be used tactically to add South African exposure to a diversified portfolio--South African stocks account for about 7% of the value of the MSCI Emerging Markets Index. However, investors should note that this fund does not hedge its exposure to the volatile South African rand. Consequently, depreciation in the value of the rand relative to the U.S. dollar can hurt the fund's returns.

The quality of this fund's holdings is above average, relative to its emerging-markets peers. First, earnings of the MSCI South Africa Index (in local currency) have steadily risen over the past decade, with the exception of 2009. Secondly, the volatility of returns of the MSCI South Africa Index is in line with that of the S&P 500 (usually, the volatility of a single-country emerging-markets index is much higher than that of the S&P 500). Finally, over the past five years, many of this fund's top holdings have steadily increased their dividends.

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Patricia Oey does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.