Egyptian Riots … ETFs … And The Opportunities (EGPT, AFK, PMNA, GAF, GULF, MES, TUR, XLES, XES, IEZ)

If you turned on your TV in the last week or so, you almost certainly saw coverage of the protests in Egypt. Almost overnight, the media narrative moved from Washington to Cairo.

Unfortunately, much of the commentary I heard was not exactly helpful. The networks trotted out the same pundits they turn to for commentary on politics and Hollywood. Entertaining, but not exactly enlightening.

For instance, we didn’t hear much about why those people in the streets are so unhappy. I suspect their concerns are far more economic than political. That’s usually the case when countries enter such turmoil.

I can’t tell you how it will all end — but I can tell you how it may impact your ETF investments.

Let’s start with …

Egyptians take it to the streets.
Egyptians take it to the streets.

Three ETFs with Direct Egyptian Exposure

ETF sponsors have been busy trying to fill every niche they can over the last few years. In the process they’ve introduced several Middle East products for American investors, who eagerly snapped them up.

Some of those investors may be saying “oops” right now. Stocks based in Egypt swooned when the protests erupted and then stopped trading completely when local exchanges were closed. The result for ETFs that hold those stocks varied, depending on how much Egyptian exposure they have.

Not surprisingly, Market Vectors Egypt (NYSE:EGPT) was hurt the most since it has 100 percent of its assets in Egyptian stocks. From its high point in the first week of the year, this relatively new fund (inception date 2/18/2010) was decimated. EGPT plunged more than 21 percent before making up a little of its loss.

You’ve heard me say many times: “Emerging markets ETFs are volatile.” EGPT is a good example, but it’s far from the only one. Just in recent memory, we’ve seen similar sudden pullbacks in ETFs covering Thailand, Vietnam, and others. It will happen again elsewhere.

Market Vectors Africa (NYSE:AFK) may not sound like it would have much to do with Egypt. But check your World Atlas: Egypt is part of Africa. It’s a big part of Africa, too, at least in financial terms.

AFK has about 21 percent of its assets in Egyptian stocks. In percentage terms, it wasn’t hit quite as badly as EGPT last month, but the drop was still very noticeable.

PowerShares MENA Frontier (NYSE:PMNA) specializes in stocks from the Middle East and North Africa (“MENA” is lingo for the region). PMNA has about 16 percent of its portfolio directly invested in Egypt, making it almost as vulnerable as AFK.

Then there is the …

Spillover Effect to Other Regional ETFs

Will instability in Egypt spread through the region?
Will instability in Egypt spread through the region?

One of the more disturbing aspects of Egypt’s crisis is the potential for unrest to spread elsewhere. In fact, the protests in Cairo were sparked by a popular uprising in Tunisia. This can happen far more easily now than it did in a pre-Internet world.

Here are a few more ETFs with significant Middle East exposure. All are at risk if instability turns infectious:

  • SPDR S&P Emerging Middle East & Africa (NYSE:GAF)
  • WisdomTree Middle East Dividend (NYSE:GULF)
  • Market Vectors Gulf States (NYSE:MES)
  • iShares MSCI Turkey (NYSE:TUR)

Please note, I’m not predicting problems for any of these ETFs. I’m just pointing out what could happen. They may do just fine.

Sector Impact: What to Watch

Investment crisis events can have effects far away from the geographical area involved. The effects can be either bullish or bearish, too. Case in point: Egypt’s problems appear, so far at least, to be quite beneficial for the worldwide energy sector.

Oil prices carry a risk premium.
Oil prices carry a risk premium.

There are two reasons for this:

First, instability in major oil-exporting countries always creates a “risk premium” in oil prices. That means more profits for anyone with oil to sell.

Second, the possibility (however remote) that Egypt’s oil reserves could become inaccessible makes oil fields elsewhere even more valuable. This is good news for the energy service companies who would be called on to bring new fields into production quickly.

Here are three energy ETFs that have been moving up in the last two weeks:

  • iShares Dow Jones U.S. Oil Equipment & Services (NYSE:IEZ)
  • SPDR S&P Oil & Gas Equipment & Services (NYSE:XES)
  • PowerShares S&P SmallCap Energy (NYSE:XLES)

Emerging markets ETFs can move up just as fast as they went down. And crisis often creates opportunity. So I won’t be surprised if the protesters in Egypt turn out to have handed us a golden chance for profit in some way.

It’s something I always watch for. I suggest you do likewise.

Better yet, check out my International ETF Trader. This service is designed to help you profit from ever-changing global market conditions, like we’re seeing in Egypt now, by identifying which ETFs have the most potential at any given time.

Written By Ron Rowland From Money And Markets

Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.

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