Thursday, April 5, 2012

Southeast Asia ETF Investing 101 - Zacks.com

Southeast Asian countries have had a long tradition of enticing investors from all over the globe. This is because the market is an attractive destination for domestic and foreign, investors thanks to solid growth rates, booming populations and generally good governance.

The region has recovered nicely from the shocks of 1998 and many countries have developed significant capital stocks in order to buffer themselves from future issues, a trend that could reduce risk going forward. Thanks to this and weak performances in some BRIC markets, many countries have seen a substantial amount of inflow in the recent past, sparking new developments in both the manufacturing and natural resource industries.

Countries that form the Southeast Asian area also?generally-- belong to the league of emerging markets. The growth potential of these markets are higher that most of the developed economies in the area such as Australia or Japan.

In fact, the high expected growth rates of these economies (Vietnam 6.1%, Malaysia 5%, Indonesia 7% etc.) beat out developed markets by leaps and bounds and could be very sustainable thanks to increases in per capital income and consumption in the burgeoning middle class in these markets (see Australia ETFs: A Developed Market Play On Asian Growth).

These economies are generally agricultural and labor intensive, however, as of late the picture has been changing. The economies have been strategically revamping their outlook by making provisions for Foreign Direct Investments (FDIs) to invest in their economies.

For example, in order to create a more investment friendly climate for FDI, Indonesia is trying to improve its budget deficit that has been out of proportion due to increased government spending on fuel subsidies while at the same time maintaining political and social harmony in the huge market. (see Van Eck Launches Indonesia Small Cap ETF (IDXJ))

Southeast Asia ETF Investing

On the equity front, Southeast Asian ETFs are comparatively ?cheaper? than most developed market equities trading at attractive valuations with very little correlation among the two. On the debt front, the yields in most developed nations are lower than that of Southeast Asian markets because the former enjoys superior credit ratings than the latter.

Therefore, it is prudent to note that over a longer term, both equity and debt looks attractive in these markets having the potential for long term capital appreciation and high current income. (Read Three Emerging Market ETFs To Limit BRIC Exposure)

These countries are also somewhat immune to Western shocks and are an interesting option given the broad recovery in the U.S. However, there are certain risks like liquidity risk, geopolitical problems, and currency issues which can hurt the region.

Thanks to this, an ETF approach is a prudent way to tap these high performing but volatile markets due to its basket approach of investing as well as flexibility in terms of trading, making a Southeast Asia ETF the way to go for most investors. ?

Beyond Global X?s ASEAN 40 ETF (ASEA), which targets investments across five key Southeast Asia markets, there are a number of ETFs that target individual countries. For investors intrigued by the growth prospects in this area, as well as the high number of ETFs in the region, any of the following Southeast Asia ETFs could make for interesting picks going forward:

Market Vectors Indonesia Index ETF (IDX)

Founded in January 2009, IDX seeks to track the price and yield performance of the Market Vectors Indonesia Index. It holds 38 securities in all with 55.04% of its total assets in the top 10 holdings. The fund is heavily exposed to financials, basic materials and consumer defensive sectors which make up more than 65% of the fund?s total assets whereas real estate, healthcare and energy make the bottom three sectors of the fund.

IDX charges investors 60 basis points in fees and expenses making it one of the low cost choices in the broader Indonesian market. ?The fund has witnessed $529.5 million worth of inflows in its asset base since its inception roughly three years back, suggesting that the product is reasonably popular among investors.

iShares MSCI Indonesia Investable Market Index (EIDO)

Debuting in May of 2010, EIDO seeks to track, before expenses, the price and yield performance of the MSCI Indonesia Investable Market Index. The market capitalization weighted index consists of stocks which are traded across the Indonesian stock exchanges. Presently, the stock holds 87 securities with 58.53% of its assets in the top 10 securities (read more at the Zacks ETF Center).

Additionally, the fund has not been able to diminish concentration risk as it is heavily dependent on Astra International Tbk PT (comprising 13.21% of its net assets), and is largely exposed to the financial sector comprising 30.83% of its assets. However, the fund does pay out a moderate yield of 1.16% per annum while the net operating expenses of the fund are slightly lower at 0.59% versus the more popular IDX and its expense ratio which is one basis point higher. ?

iShares MSCI Malaysia Index (EWM)

EWM tracks the iShares MSCI Malaysia Index and aims at providing returns corresponding to the price and yield performance of the aforementioned benchmark. The capitalization weighted index concentrates on securities listed on the Kuala Lumpur Stock Exchange and is rebalanced quarterly.

The fund charges 52 basis points in fees and expenses thus providing a good opportunity for investors looking to play the Malaysian markets in a cost effective way. The fund looks slightly overvalued compared to its counterparts with a price to earnings multiple at 18.67, but it also pays a good yield of 4.06%. However, the fund is concentrated on the financial sector holding 30.90% of its assets in the segment.

Market Vectors Vietnam ETF (VNM)

After a period of isolation with many world markets, Vietnam is finally coming on strong in the global space. For investors looking to play this trend, Market Vectors? VNM offers one of the only options for targeted exposure to the nation (see Is The Vietnam ETF Back On Track?).

The fund employs a full replication strategy holding all the securities in the index. ?The main benchmark is the Market Vectors Vietnam Index which consists of 34 securities in total. Like most of its counterparts, it is heavily exposed to financials which make up 43.9% of its assets. Additionally, with an expense ratio of 0.76%, this fund is one of the most expensive in this category.

However, it holds 56.78% in its top 10 holdings and has seen a substantial amount of inflows in its asset base since its inception in August 2009. Currently the fund has net assets of $275.74 million and focuses mostly on mid and small cap companies, offering decent diversification from a market cap perspective.

iShares MSCI Singapore Index ETF (EWS)

EWS tracks the MSCI Singapore Index and seeks investment results that correspond to the price and yield performance of the said index before fees and expenses. The fund has been in existence for over 15 years and has an asset base of $1.55 billion, making it among the most popular ETFs in the region.

The fund normally invests in shares listed on the Singapore stock exchange, however, it may also invest in depository receipts that closely resemble the securities in the index. Being one of the oldest and major players in the Southeast Asian market ETF space, the fund charges 52 basis points in fees and expenses, but is heavily exposed to the financial sector which comprises almost 45% of its total. The fund is extremely concentrated in its top 10 holdings with 64.17% of its total assets invested in those securities.

iShares MSCI Philippines Investable Market Index ETF (EPHE)

EPHE provides an opportunity for the investors to cash in on the growth potential of the Philippines economy since the underlying index, MSCI Philippines Investable Market Index, is a market capitalization weighted index that ?tracks the broader Philippines equity market.?

The fund was launched in September of 2010 and has total assets worth $115.15 million. It holds 38 securities with 56.51% of its assets in its top 10 holdings. Like most of the broader Southeast Asian market ETFs, this fund also lays maximum emphasis on the financial sector. Yet, with that being said, the fund pays out a yield of 91 basis points per annum and charges 0.59% as expenses.

iShares MSCI Thailand Investable Market Index ETF (THD)

The fund also has difficulty eliminating concentration risk as it holds around 60% of its assets in the top 10 holdings, although it does have 85 securities in its portfolio. Like most of its counterparts, it is heavily exposed to the financial space as this segment makes up roughly one-third of its assets. The fund tracks the MSCI Thailand Investable Market Index which looks to follow the performance of the broader equity markets of Thailand.

The fund pays out a good yield of 2.49% per annum while charging just 59 basis points in fees and expenses. Since its inception in early 2008, the fund has managed to accumulate a very respectable $735.12 million in its asset base, giving the product solid volume and tight bid ask spreads.

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