I’m American with a growing retirement account who sees a bright future for Africa. I’d like to invest there, but I don’t see any good option for doing so. I’m also not the right person to create that option- but I think one of you might be.

What I want: a US exchange-traded fund (ETF) that invests in companies across Africa, diversified across all sectors EXCEPT mineral extraction.

Why is this EA: promote economic growth in Africa by lowering the cost of capital for African entrepreneurs

Why existing ETFs don’t work: There are currently 4 US ETFs focused on Africa. 3 are country-specific funds that focus on Egypt, South Africa, and Nigeria respectively. But I’d like to diversify across countries, and to bet on poorer countries rising to middle-income status. Currently the only US ETF that is diversified across Africa is AFK: VanEck Vectors Africa Index. But while AFK is diversified across countries, it is heavily concentrated in one sector: mineral extraction. This is a big problem from both my selfish and altruistic points of view.

From the altruistic point of view: mineral extraction can lead to the resource curse, which may be a major factor undermining democracy and prosperity in Africa. It also tends to be one of the worst industries for the environment.

From the selfish point of view: the concentration of the fund in any single sector makes it riskier (AFK is also concentrated in relatively few countries- South Africa and Morocco alone make up half its holdings). Minerals in particular seem likely to be a bigger part of Africa’s past than its future- my bet is that rising human capital, disease eradication, and improving economic policies will lead the African manufacturing and service sectors to prosper while minerals stagnate. Finally, AFK simply hasn’t performed well in the past- its price is down substantially from its inception in 2008, a period where both African GDP and global markets grew substantially. AFK currently has $55 million under management, which is small as ETFs go. I think an ETF that excludes minerals and markets itself as environmentally sustainable could attract greater inflows by attracting people to “feel good about investing in Africa”- and likely by beating AFK’s returns as well.

Who should build it: I’d like to invest in this fund but I don’t think I could build it myself- while I have an economics PhD, I’ve never worked in finance or set foot in Africa. This would work best as a project for someone who is already at one of the companies offering emerging markets or ESG ETFs, like Vanguard or iShares. But someone with a finance background and the right connections and drive might be able to pull it off independently

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It seems plausibly good for the world if this existed. But for you personally, investing in AFK (or investing conventionally and donating the higher risk-adjusted returns) might be fine. See these articles:

 

If you wanted to make this happen, another path to success could also be to find investors with sufficient interest, then approach a white-label ETF provider and get them to set up a fund, see here.

Some encouraging quotes from that podcast:


"you have a lot of opportunity, in my mind, if you’re a charity, to say, “Look, people love giving us money.” But we could invest in ESG-style companies that fulfil our mission, or what we’re trying to do or we believe in, and the management fee can go to the charity."

"particularly if you’re a fund where nothing else exists. For example, there’s only one African ETF. And if Africa goes gangbusters, guess who’s going to get the inflows?"

I'm in AFK for now, agree that its probably better than nothing.

Your podcast link was helpful, especially the ballpark numbers confirming roughly what I expected. The white label providers make it much easier from a legal/paperwork perspective, but it would take about:
~50k+ in startup expenses (probably higher to deal with multiple small foreign stock exchanges)
~$2.5mil in assets invested to get the ETF launched
~$20mil in assets under management to get to profitability

Overall that link together with the other reading I've done on white label providers the last few days have updated my idea of who could best pull this off. Background in finance and/or Africa no longer seems necessary (though would still be good). Instead fundraising skill/networks seems like the key. Still not my strength but relatively common in EA- everyone please feel free to steal the idea and run with it.

This was a creative and unusual post, and I'm really glad you shared it.

EA draws interested people from a lot of backgrounds, and the more posts like this exist, the easier it is for me (and anyone else they might ask for advice) to point out a variety of projects they could explore. The person with a perfect background for this might already be in an EA group somewhere — and if not, they might join one sometime in the next few years.

For economics ignoramuses like me, is there anything you'd recommend reading to better understand the impact of ETF-like entities on the economic growth of countries they invest in? 

It seems reasonable that the ETF you propose would in fact lower capital costs and promote entrepreneurship, but I don't have a sense of whether that idea is at all controversial // what happened as the result of past ETF investment in emerging markets. (I'm also uncertain about the scale of impact we might expect from a fund of a given size, whether impact would be linear vs. logarithmic based on fund size, etc.)

This resonates a lot with me, I had exactly the same problem when wanting to invest in Africa. At the moment it's not part of my portfolio because of the above mentioned reasons. I work in investment finance and understand a bit about construction, I also know white label companies that could be approached. However I currently don't have the time to focus on it! You can reach out to me via sana@sagefund.eu

I guess we could have a little bit more posts about the "world's most pressing low hanging fruits" like this