A dichotomy is presented to ETF investors when they opt to
evaluate a fund that has a large portion of its weight in just
one sector or a one or stocks. That dichotomy is excessive
weights to a single sector or a small number of stocks can work,
but not forever. Just ask those that
got stuck holding ETFs with heavy Apple
Excessive sector weightings are particularly prominent among
and the alarmingly high allocations usually go to one or some
combination of the following three sectors: Energy, financial
services and materials.
For example, the iShares FTSE China 25 Index Fund (NYSE:
) is often maligned for its large weight to Chinese banks,
currently almost 60 percent. The iShares MSCI All Peru Capped
Index Fund (NYSE:
) is not the place to be for investors looking to avoid materials
stocks because that sector represents almost 49 percent of EPU's
All that said, there are signs that two emerging markets ETFs
tracking the same country could benefit this year from large
allocations to bank stocks. Those funds are the iShares MSCI
Indonesia Investable Market Index Fund (NYSE:
) and the Market Vectors Indonesia ETF (NYSE:
). IDX, the older of the two largest Indonesia ETFs, has
almost 30 percent weight to banking names
. EIDO's weight to the same sector is north of 34 percent.
For now, those large weights to banks could serve EIDO and IDX
because Indonesian banks have emerged as a leadership, having
helped lift the Jakarta Composite Index to an all-time high
during Friday's Asian session.
Indonesian, Indian and Philippine lenders are the most
attractive and feature the "highest next-12-month banking sector
performance" among emerging Asian financial services firms,
Bloomberg reported, citing a note from
During Asian trade Friday, a strong earnings report lifted
Bank Rakyat almost two percent to its best close since November
2003, according to Bloomberg data. Rivals Bank Negara Indonesia,
Bank Mandiri Persero and Bank Central Asia soared 8.3, five and
3.6 percent, respectively. In the case of Bank Mandiri and Bank
Central Asia, those stocks moved to all-time highs.
Bank Central Asia, Bank Rakyat and Bank Mandiri are three of
IDX's top-five holdings with Bank Negara found further down the
ETF's roster. Combined, the quartet equals 23 percent of IDX's
weight. The first three names also represent three of EIDO's
top-five holdings. In that fund, Bank Central Asia, Bank Rakyat
and Bank Mandiri combine for 23.1 percent of the total
Friday's bullish trade had good reasons behind it. On Monday,
Moody's Investors Service placed a stable rating on the
Indonesian banking system, saying it "will remain stable for the
next 12-18 months."
"We expect 6 per cent GDP growth, 20 per cent loan growth and
low credit costs in 2013. These trends will protect the Indonesia
banks' strong capital generation capacity,"
according to the ratings agency
Fitch Ratings also announced a stable outlook for Indonesian
banks on Wednesday. Fitch conducted a "stress test" of the nine
major Indonesian banks and found those banks would incur loan
losses, on average, of 3.8 percent in a downward cycle, but that
those losses would be easily covered by pre-loss provisions.
Adding to the bull case for IDX and EIDO is the impressive
Tier 1 capital ratios being sported by Indonesian banks. "The
combined Tier 1 capital, which is composed entirely of
high-quality common equity, of these banks stood at an average
14% of risk-weighted assets at end-H112,"
according to Fitch
By comparison, J.P. Morgan Chase's (NYSE:
) Tier 1 capital ratio was 8.4 percent at the end of September
. Bank of America's (NYSE:
) was 8.97 percent, the ratings agency said.
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(c) 2013 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.
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