Financial marketsPart 5: An Overview of the ETFs Market in Africa

Kennnedy MuturiFebruary 4, 20233669 min

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Note: This is a 5-part series that covers the following areas

  • Part 1: An overview of the ETFs market globally
  • Part 2: Evolution of ETFs -1st -4th generation ETFs
  • Part 3: The Future of ETFs (post 2030)
  • Part 4: The Risks & Rewards associated with exotic ETFs
  • Part 5: An overview of African ETF Market-Challenges faced

Part 5: An Overview of the ETFs Market in Africa

Africa has always been a blind spot for investors when it comes to matters regarding ETFs and passive investors. One of the major ironies of the world’s global investment climate is that due to the strong demand for emerging- market ETFs, including those with African exposure, investors tend not to think too much about Africa itself. As a result, Africa has the smallest ETF market of any continent that has been estimated to be approximately US$6 Billion by Blackrock ETP Landscape report.  This is attributed to the following three reasons:

Few Listings: Generally, African continent has very few listings. (Rwanda, for example, has only nine listed companies). Businesses are often family-run and rarely have an eye to listing stocks, despite pressure from exchanges. This makes compiling indexes a challenge in many parts of Africa. The African ETF market, such as it is, has its home in Johannesburg. The Johannesburg stock exchange, the largest exchange in Africa, has 59 ETFs – far more than any other African country. South Africa is also largely responsible for bringing ETFs to other sub-Saharan countries. For example, Namibia, Ghana, Kenya and Botswana have ETFs trading on their exchanges. But in each of these countries, their ETFs are cross-listed from South Africa.

Number of Listings in Africa

Source:  ETF Stream

Liquidity: Liquidity risk is an issue for ETFs of all shapes and sizes. The secondary markets where ETFs are bought and sold typically use the average volume of shares traded as a liquidity indicator. ETF creation and redemption in the primary market can affect this liquidity by changing the shares outstanding in the secondary market. The ease of creation and redemption by the APs depends on the liquidity of the underlying instruments. Therefore, the ETF shares’ liquidity in the secondary market is indirectly dependent on the liquidity of the underlying instruments — and less so on the dollar volume of the ETF shares traded. In addition, shares listed on African Exchange rarely change hands.

Tracking: It is prudent to mention that countries of high finance normally track equities. However, in Africa most of the ETF track precious metals such as Gold and Silver. In that regards, US$ 6Bn of the African ETFs market, almost 40% of this is a single gold tracker (value of US$N2.5 by New Gold by Absa Capital). Gold ETFs were among the first stones to roll in many countries, including the US, where the World Gold Council helped launch GLD. Gold ETFs can be easier for ETF providers to explain to the uninitiated investors and regulators as they only track one thing. So if the African ETFs are gold focused for now, as they appear to be, then it is not altogether different from how other countries got their start. Nor is it necessarily different from other countries new to ETFs like India, whose ETF market is also gold-focused.

All-African index trackers are coming

In what may be a sign of things to come, green shoots are emerging in Nigeria, which has listed several ETFs that look like those in New York and London. Local issuer Vetiva, for example, has listed ETFs tracking sectors of the Nigerian economy. The Vetiva Industrial ETF tracks, for example, Nigerian industrial companies and the Vetiva Banking ETF does the same but for Nigerian banks. Despite these concerns, local ETF issuers are pushing the boundaries in terms of innovation – and novel underlying indices. AMIB50 tracks 50 blue chip African companies, mostly in Egypt, Morocco, Nigeria and Kenya. The index is then mostly made up of African telecoms and banks, but also cement companies and – curiously – a lot of breweries.

In conclusion, the African ETFs market still has room for growth. There could be more that’s coming. Stock exchanges across the continent have recently been launching education campaigns, ideally with a primary objective of increasing the number of listings. If these succeed, then African financial services may follow a similar geometry to elsewhere.

Kennnedy Muturi

Ken is a Quantitative Trader with experience in investments, quantitative finance, financial modelling and algorithmic trading in Global Investable Markets (GIM). He enjoys using Bayesian Statistics, Time Series and Machine Learning in developing Robust consistent Alphas in Equities Market, FX, ETPs and Derivatives instruments. He enjoys deep dives in understanding High Frequency Trading infrastructures and improving how the African financial markets work. He holds a Bachelor's in Actuarial Science from Strathmore Institute of Mathematical Sciences : An Executive Program in Algorithmic Trading (EPAT) certificate in Algo Trading from QuantInsti : A current MSc student in Financial Engineering at World Quant University.

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