Christmas Comes Early for Nigerian ETF Investors

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Wednesday, June 21, 2017 8:00 AM / Quantitative Financial Analytics 

The Nigerian stock market has been showing great improvement since the beginning of May 2017 with most of the indices showing double digit returns. The Allshare index now boasts of a YTD return of 27.02%, the NSE pension and Premium index are in an all-time high with returns of 49.65% and 35.4% respectively. The Banking index is home with a YTD return of 51.92% and the NSE 30 index is smiling with 30.31% return, YTD.

It has never been this good, at least, in more recent years. The market rally has been propelled in part by the stability in the Naira exchange rate following the aggressiveness of the Central Bank and by the IMF’s statement that Nigeria is out of recession. In addition to those, the recently released inflation report adds to the good news as well as Fitch’s “prophesy” on the improving foreign currency liquidity in Nigeria. All those have combined to add a boost to the market. Believe it or not, the capture of Evans, the kidnap king pin has had its salutary effect on the market as it helps to douse fears about the security situation in Nigeria.

One investment type that has been riding the tide of this market rally is Exchange Traded Funds, ETFs. Prior to the month of May and in-fact for the greater part of last year, ETF holders were reeling in pain asking what hit them, but that story seems to be changing or has totally changed.

ETF prices rallied upward of 20 percent in the month of May alone wiping off almost all the prior months’ losses and drags. Quantitative Financial Analytics has revealed that its May performance analysis indicates that the first 6 best performing funds in the month are all ETFs. Specifically, Vetiva Banking ETF returned 26.41%, New Gold ETF, 20%, Vetiva Consumer Goods ETF, 17.05% while Stanbic IBTC 30 ETF came back with 16.91% return. Vetiva 30 ETF and Stanbic IBTC Pension 40 ETF returned 14.45 and 13.08% respectively with Lotus Halal ETF returning 10.3%.  This performance has continued in the month of June with most ETFs recording upwards of 15% return so far in June.

Surprisingly, a deeper analysis indicates that the ETFs that are more highly correlated to the all share index did slightly worse than those with lower correlation. This shows that the effect of the rally is more related to sectors of the economy than to the overall market performance. While the banking sector ETFs with 0.67 correlation performed best, Stanbic IBTC 30 and Vetiva 30 ETF both with a 0.98 correlation did not do as good as the banking ETF. 

Compared to safe-haven assets like bonds and treasuries, ETFs seem to be getting some reward for their additional inherent risks. According to Quantitative Financial Analytics, equity based ETFs are doing far better than the newly introduced Vetiva S&P Sovereign Bond ETF, which is purely a fixed income based Etf. However, the yield on 10-year Nigeria Treasuries rose by 8bp to 16.15% while 20-year yield contracted by 7bp to 16.01% in May.

If the good economic news about Nigeria continues, ETF investors may be celebrating Christmas earlier.

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