The emerging Asian economies have long provided investors the
flexibility to shift focus from developed markets in their quest
for high levels of diversification. Not only have these markets
provided relatively uncorrelated returns, but they also offer up
outsized growth potential and access to booming economies.
One interesting but often overlooked economy is that of
Indonesia. Like other emerging economies the Indonesian economy
is characterized by high economic growth rates, rising middle
class population, increase in domestic consumption and a high
rate of inflation.
In fact, even in these times of economic uncertainty, the
Indonesian economy has managed to grow at an impressive rate and
is even expected to grow at an accelerated pace going forward (as
per IMF forecasts) (see
Buy These Emerging Asia ETFs to Beat China,
India
).
Also, on the inflation front, the Consumer Price Index (CPI)
increased to 4.61% in October 2012, from 4.31% the previous
month. However, over the past one and a half years the economy
has done well in reducing the inflation from well over 6% in
April 2011 (data as per Bank Indonesia).
With reducing debt to GDP ratio and its recent upgrade in
sovereign rating to investment grade status, the economy is sure
to attract foreign capital flows in the form of portfolio flows
which is most likely to boost the stock markets. Furthermore,
thanks to its focus on domestic consumption, the Indonesian
economy could be better prepared than most if Western nations
crumble once more (read
Forget China, Buy These Emerging Market ETFs
Instead
).
Given this, a look at a top ranked Indonesian ETF could be the
way to target the best of the emerging market segment, with lower
overall risk. One way to find a top ranked ETF in the emerging
market world is by using the Zacks ETF Ranking system.
About the Zacks ETF Rank
The Zacks ETF Rank provides a recommendation for the ETF in
the context of our outlook for the underlying region, industry,
sector, style box, or asset class. Our proprietary methodology
also takes into account the risk preferences of investors.
ETFs
are ranked on a scale of 1 (Strong Buy) to 5 (Strong Sell) while
they also receive one of three risk ratings, namely Low, Medium,
or High.
The aim of our models is to select the best ETFs within each
risk category. We assign each ETF one of five ranks within each
risk bucket. Thus, the Zacks Rank reflects the expected return of
an ETF relative to other products with a similar level of risk
(see more in the
Zacks ETF Center
).
For investors seeking to apply this methodology to their
portfolio in the Indonesian market, we have taken a closer look
at the top ranked IDX below:
Market Vectors Indonesia ETF (
IDX
)
Launched in January of 2009,
Market Vectors Indonesia Fund (IDX)
is a passively managed exchange traded fund (ETF) designed to
provide broad exposure to the Indonesian equity market with a
focus on resembling the risk-return characteristics of large cap
equities.
IDX seeks to match the performance and yield of the Market
Vectors Indonesia Index before fees and expenses. The index
measures the performance of stocks listed in the Indonesian stock
markets and is composed of 40 large cap stocks.
IDX provides an opportunity for diversification since the ETF
is not strongly correlated with the S&P 500 index as
indicated by an R-Squared value of 56% (read
Do Country ETFs Really Provide
Diversification?
). The ETF charges a somewhat high 57 basis points in fees and
expenses.
However, it has attracted a good amount of inflow in its asset
base which stands at $412.60 million. This coupled with a high
average daily volume of 239,000 shares has resulted in a reduced
bid-ask spread for the product.
This ETF is appropriate for investors seeking a broad exposure
to Indonesian equity markets with a focus on large cap equities
with a medium to long term view. However, investors should
remember that like any other emerging market, investing in
Indonesian equities requires at least a modest appetite for
risk.
Similar to most emerging Asian nations, growth in the
Indonesian economy had also slowed down during the previous
fiscal year. However, increased domestic consumption from rising
middle class populations will be a key positive for the
Indonesian economy going forward (see
Forget the BRIC ETFs, Focus on the PICKs
).
From a sector perspective, Market Vectors Indonesia ETF relies
heavily on Financials (31%), Consumer Staples (15.60%), Consumer
Discretionary (12.80%), Materials (10.9%) and Energy (10.30%)
with double digit exposure.
Industrials, Utilities and Healthcare are sectors with least
allocation. From an individual holdings point of view, the ETF
holds 40 securities with almost 57% allocation to its top 10
holdings.
IDX got off to a good start in 2012, returning almost 5% in
the quarter ending March 2012. However, the ETF slumped by 8% in
the subsequent quarter. Nevertheless, the ETF was able to erase
some of the losses on a year till date basis, mainly thanks to
the restored confidence of investors in the riskier market
segments.
IDX has been relatively flat returning a paltry 4 basis points
for the one year period as on 31st October 2012. IDX has hit a
low of $24.20 and 52-week high of $30.90. The fund has a
high volatility as measured by its annualized standard deviation
of 30.62%, however, it currently has a Zacks Rank of
1
or
'Strong Buy'
.
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MKT VEC-INDONES (IDX): ETF Research Reports
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