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Mammoth Upside Potential with the First Indonesian ETF
By: Nathan Slaughter
Editor, The ETF Authority
Learn more about The ETF Authority (click here)
Published: January 4, 2009

     Market Vectors has just launched the first fund specifically targeting stocks in the island nation of Indonesia, the Market Vectors Indonesia Index ETF (NYSE: IDX).

     For a modest expense ratio of around 0.70%, IDX will track the performance of Indonesia's largest and most liquid companies. To be eligible for the fund's underlying index, prospective members must be actively traded and have market caps in excess of $150 million.

     At the outset, the index includes about two dozen names, concentrated mostly in the financial, energy and telecom sectors. This is common for emerging markets, nearly all of which count national (often privatized) banks and phone companies among their largest enterprises.

     There are many compelling reasons for investing in this narrowly focused fund.

     For example, you may not know that Indonesia is the largest economy in Southeast Asia, and the country has made great strides since the Asian currency crisis erupted in the late 1990s.

     With the ouster of former dictator General Suharto over a decade ago, democracy has taken root and paved the way for prudent monetary policy and sweeping structural reform. Along the way, corporate debt has been reduced, trade policies have been relaxed, accounting standards have been tightened, and deregulation has helped put dominant state-owned companies in the hands of individual investors.

     Today, Indonesia has a population in excess of 240 million people, making it the word's fourth largest country. And as is the case here in the U.S., consumer spending accounts for over half of GDP. But the country is also rich in natural resources and has become an export powerhouse.

     As a founding member of OPEC, Indonesia has vast oil/gas reserves and ranks as the world's second-biggest producer of LNG. Production has trailed off in recent years, but minerals (gold, silver, nickel), agricultural products (palm oil, coconuts, spices), and most importantly, manufactured goods like rubber have helped pick up much of the slack.

     In recent years, the country's stock exchange has reeled off some impressive gains. In fact, Indonesian stocks have been among the world's biggest winners, quintupling in value from 2003 through the end of 2007.

     As you might expect, those returns attracted quite a bit of interest from foreign investors. Unfortunately, the timing was bad for those who were late to the party, with many arriving just in time to suffer through a painful -59% correction last year.

     At the end of 2007, the combined market cap of every publicly traded company in Indonesia stood at $211 billion -- about the same as Wal-Mart (NYSE: WMT).

     That means there is still plenty of untapped potential in this fast-growing nation, but also an equal amount of risk. Given the current state of foreign markets, I suspect it will take a while for this fund to catch on -- trading volume is still next to nothing.

     However, once growth in India and China (two major trading partners) picks back up, I expect Indonesia's export activities to see a sharp rebound. If that happens, then IDX should enjoy a strong upward surge.


Nathan Slaughter
Editor
The ETF Authority

About The ETF Authority

The mission of The ETF Authority is to help our readers identify today's most profitable ETFs and closed-end funds. (Learn More)

About Nathan Slaughter

Nathan Slaughter has developed a long and successful track record over the years by investing in both exchange-traded funds (ETFs) and deeply discounted value securities. When it comes to ETFs, Nathan has created a proprietary ranking system that helps him zero in on today's most promising funds.

Nathan's previous experience includes a long tenure at AXA/Equitable Advisors, where he provided comprehensive investment advisory services to small businesses and high net-worth clients. He also honed his research skills at Morgan Keegan, where he performed asset allocation, retirement planning, and consultative portfolio management services.

Several years ago Nathan switched gears and decided to devote his time exclusively to financial analysis and writing. He has since published hundreds of articles for a variety of prominent online and print publications, and he now writes exclusively for StreetAuthority.com.

Nathan's educational background includes NASD series 6, 7, 63, & 65 certifications, as well as a degree in Finance/Investment Management. He currently resides in Shreveport, LA with wife Julie and sons Aidan and Riley. 

To learn more about Nathan Slaughter's premium investing newsletter -- The ETF Authority -- please visit this link.


 

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