Nine official African language groups and a wide mix of peoples have led South Africans to dub their homeland the "Rainbow Nation." It's a country rich in natural resources, which themselves include a rainbow of precious metals and gems, from gold to platinum to diamonds. The iShares MSCI South Africa Index Fund (NYSE: EZA), which has posted a 31% return since its inception in 2003, offers a convenient way to access that rich potential.

Fund facts

  • Inception date: 2/3/03
  • Expense ratio: 0.68%
  • Net assets: $524 million

Fund specifics
The iShares South Africa fund tracks a cap-weighted index of South African stocks. The fund holds more than 50 securities, with top holdings including mining and energy company Sasol (NYSE: SSL), communication-services company MTN Group (OTC BB: MTNOY.PK), and platinum producer and supplier Impala Platinum (OTC BB: IMPUY.PK). Materials stocks make up about a third of the fund's portfolio, followed by financials and telecom stocks.

Economic outlook
South Africa is the world's largest producer of gold and platinum and exports a significant amount of coal and diamonds. The country had been riding the wave of global growth in demand for materials, but lately, the sailing has not been so smooth. It's starting to experience some growing pains, the largest being electricity shortages. Production at South Africa's platinum and gold mines has stopped periodically when the state-owned power utility, Eskom, has been unable to meet demand. These regular and, at times, lengthy blackouts are the direct result of underestimating recent economic growth, and the outages have been severe enough to shut down mines for days or months. Those shutdowns, in turn, roil the stock and currency markets.

An unemployment rate of 25% and an extremely high poverty rate have also put a burdensome load on South Africa's economy. In the political arena, the country is preparing for a new president when current leader Thabo Mbeki steps down. One likely successor, Jacob Zuma, was recently named head of the ruling African National Congress party and has been charged with allegations of fraud, money laundering, and tax evasion.

Does it belong in your portfolio?
Because the iShares South Africa fund is a single-country ETF, there are a number of risks. Along with typical market hazards, the fund is exposed to the nation's political risks, along with substantial exposure to price fluctuations in worldwide natural-resource prices. There's also the potential for environmental problems that are common to extractive industries.

In the short term, electricity shortages are likely to continue, and that will dim South Africa's economic potential. If you already have an investment allocation for the natural-resources sector, investing in this fund might raise your risk level beyond your comfort zone.

In the long run, however, South Africa is a bright light in the African continent, with a vibrant developing economy. The fund's exposure to several highly sought-after resources makes it worth keeping an eye on.

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Fool contributor Zoe Van Schyndel lives in Miami and enjoys the sunshine and variety of the Magic City. She does not own any of the funds or securities mentioned in this article. Sasol is a recommendation of the Income Investor and Global Gains newsletter services. The Motley Fool has a disclosure policy.