Published: June 28, 2010

It just might be one of the biggest, far-reaching pacts of the decade -- and I'm betting you've never heard of it. It will govern business in more than a dozen countries, influence the shopping patterns of 1.9 billion consumers and facilitate trade in a region whose annual GDP now stands at $6.6 trillion and rising.

I'm talking about the China-ASEAN Free Trade Agreement (CAFTA). The historic agreement took effect January 1st of this year with barely a word from the financial media (at least in this hemisphere). Undersea earthquakes also pass without notice, but the tsunamis that follow are felt around the world. I think that's what's been unleashed here: a massive wave of economic activity washing over the Pacific Rim.

We all know that China has an insatiable appetite for just about every raw material you can imagine. Each year the country devours mountains of foreign coal, oil, copper and iron ore (among others) to feed the its economic engine. Those supplies often come from distant lands like Brazil, but many orders are increasingly placed with nearby neighbors.

Palm oil is coming in from Indonesia, rubber from Malaysia and petrochemicals from Singapore. China's imports aren't merely limited to natural resources, either -- manufacturers in the Philippines are busy sending over semiconductors and Taiwan has seen surging demand for products like computers and mobile phones.

Annual trade between China and the Association of Southeast Asian Nations (ASEAN) had already mushroomed from $40 billion in 2000 to $193 billion last year. But the new agreement (the world's largest in terms of population coverage) has removed old fetters and paved the way for almost unrestricted trade.

Tariffs on 90% of ASEAN goods entering the Chinese marketplace have been virtually eliminated, with rates slashed from 9.8% to 0.1%. This duty-free shopping will make it easier than ever for Asian producers to get their products in the hands of Chinese consumers. Likewise, Chinese goods being shipped out will see favorable treatment abroad.

It's only been a few months, but the early results are nothing short of extraordinary.

Taiwan enjoyed its strongest export gains in 30 years in January, with sales to China surging +188%. By comparison, exports to the United States grew +14%. And as I told my ETF Authority readers in April, Indonesia is also on the fast track after China gobbled up $3.1 billion worth of Indonesian goods last quarter, a triple-digit increase.

China has leapfrogged the United States to become ASEAN's third largest trading partner. At the current trajectory, it's only a matter of time before it becomes the biggest.

That growth will open up a world of opportunities for a wide range of companies. As was the case with the North American Free Trade Agreement (NAFTA), some industries will struggle to remain competitive in the new playing field, but others will feast. The agreement will eliminate barriers, promote efficiency, create jobs and bolster the spending power of Asian consumers.

Some of the robust percentage gains can be attributed to the fact that we were gripped by recession this time last year. But the latest tabulations from China's General Administration of Customs (GAC) show that trading activity remains scorching hot. In May, China reported a +48.3% jump in imports and a +48.5% surge in exports, transactions valued at $244 billion dollars.

By comparison, the total from May 2008 maxed out at $221 billion. In other words, Asian trade isn't just recovering -- it has blasted past pre-recession levels. And that's why I continue to steer my readers toward the SPDR Emerging Southeast Asia (NYSE: GMF) exchange-traded fund (ETF).

Launched in 2007, GMF is designed to mirror the performance of the S&P Asia Pacific Emerging Markets Index. The portfolio covers nearly all of the nations that stand to benefit from CAFTA. About one-third of the fund's assets are invested in China, while the remainder is judiciously spread among Taiwan, Malaysia, Indonesia and several others.

The fund isn't specifically geared toward trade per se, but the bulk of the portfolio is invested in sectors like information technology, materials and consumer discretionary that will enjoy a stiff tailwind from the relaxed rules. Top holdings include familiar names like PetroChina (NYSE: PTR) and Taiwan Semiconductor (NYSE: TSM). Investors will also have exposure to companies like Hon Hai Precision, the world's largest electronics parts maker -- which just posted a +50% jump in first quarter sales.

As you might expect, GMF was hit hard during the downturn of 2008, but the fund posted a powerful gain of +74% in last year's rally. Its annualized returns during the past three years outpace the benchmark MSCI EAFE Index by more than 1,500 basis points a year.

Action to Take --> GMF has outscored 85% of all funds in the Asia/Pacific category since 2007. And with CAFTA now almost fully implemented, the road ahead looks even brighter. That promising outlook, combined with low fees, stellar tax efficiency, reasonable valuations and top-tier risk/adjusted performance all play a part my giving the fund a top score for my ETF Authority readers.

-- Nathan Slaughter
Editor
StreetAuthority Market Advisor
The ETF Authority