Wednesday, June 21, 2017 8:00 AM / Quantitative FinancialAnalytics 

The Nigerian stock market has been showing great improvement sincethe beginning of May 2017 with most of the indices showing double digitreturns. The Allshare index now boasts of a YTD return of 27.02%, the NSEpension and Premium index are in an all-time high with returns of 49.65% and35.4% respectively. The Banking index is home with a YTD return of 51.92% andthe NSE 30 index is smiling with 30.31% return, YTD. 

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

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

ETF prices rallied upward of 20percent in the month of May alone wiping off almost all the prior months’losses and drags. Quantitative Financial Analytics has revealed that its Mayperformance analysis indicates that the first 6 best performing funds in themonth are all ETFs. Specifically, Vetiva Banking ETF returned 26.41%, New GoldETF, 20%, Vetiva Consumer Goods ETF, 17.05% while Stanbic IBTC 30 ETF came backwith 16.91% return. Vetiva 30 ETF and Stanbic IBTC Pension 40 ETF returned14.45 and 13.08% respectively with Lotus Halal ETF returning 10.3%.  Thisperformance has continued in the month of June with most ETFs recording upwardsof 15% return so far in June. 

Surprisingly, a deeper analysisindicates that the ETFs that are more highly correlated to the all share indexdid slightly worse than those with lower correlation. This shows that theeffect of the rally is more related to sectors of the economy than to theoverall market performance. While the banking sector ETFs with 0.67 correlationperformed best, Stanbic IBTC 30 and Vetiva 30 ETF both with a 0.98 correlationdid not do as good as the banking ETF. 

Compared to safe-haven assets likebonds and treasuries, ETFs seem to be getting some reward for their additionalinherent risks. According to Quantitative Financial Analytics, equity basedETFs are doing far better than the newly introduced Vetiva S&P SovereignBond ETF, which is purely a fixed income based Etf. However, the yield on10-year Nigeria Treasuries rose by 8bp to 16.15% while 20-year yield contractedby 7bp to 16.01% in May.

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

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