The ETF is designed to mirror the performance of the MSCI South Africa Index, offering exposure to companies listed on the index. These include telecoms firm MTN Group, energy and mining company Sasol and financial firms Standard Bankl and Investec. The index is market-capitalisation weighted, representing the biggest companies in South Africa, with the basic materials sector featuring heavily.
The ETF uses physical replication in tracking the index, investing directly in the securities in generally the same proportions as in the index. Where physical investment is difficult to achieve the ETF can replicate index performance using derivatives. It may also use derivates to reduce tracking error, enabling the ETF to more closely reflect the index performance.
HSBC says South Africa is one of the bigger emerging market economies and is attractive from an investment viewpoint because it is rich in natural resources, with well developed financial, communications, energy, and transport sectors. It is difficult for UK investors to access the region unless part of a broader Africa or global emerging markets fund, or an offshore fund that is not regulated by the FSA.
Some investors will be looking for cheap and liquid exposure to South Africa through an ETF. With a total expense ratio of 0.6 per cent, HSBC’s ETF is 0.14 per cent cheaper than the iShares MSCI South Africa ETF, which also uses physical replication with the flexibility to use derivatives if necessary.