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Van Eck, the ETF issuer responsible for a series of popular hard asset and country specific ETFs, has just expanded its emerging market lineup once again with a brand new fund. The product, the Market Vectors Indonesia Small Cap ETF (IDXJ - ETF report), will target securities that are based in or derive a significant amount of their revenues from the populous Southeast Asian nation.
This marks Van Eck’s first foray into small cap ETFs in the Southeast Asian region and just the second product overall to target the market capitalization size in the space, following iShares and their launch of a Small Cap Singapore Fund (EWSS - ETF report) earlier this year. The ETF could see interest from investors seeking to make a play on pint sized securities in emerging markets while also moving beyond the BRIC bloc (read Three Overlooked Emerging Market ETFs).
After all, investors already have small cap ETF options in all four of the BRIC components while some of the less liquid emerging markets look to have small cap options at some point this year as well. Given this trend, and the belief by some that small caps can provide investors with exposure that more closely correlates to situations in the home country, IDXJ makes a lot of sense from a product development perspective.
Indonesia is becoming an increasingly popular choice for investors seeking emerging market exposure with lower correlation levels. The country has a huge domestic market and has been better insulated from Western shocks than many of its export-centric peers in the region. This has allowed Indonesia to be a relatively stable market in years past while still providing investors with growth opportunities (see Top Three Emerging Market Consumer ETFs).
Beyond domestic consumption, the country could also see more manufacturing and basic good exports as well. The nation has huge supplies of oil and gas as well as possessing large stocks of wood, palm oil, and rubber too. Additionally, due to the low cost of labor in Indonesia—especially when compared to other Asian manufacturing hubs— the country could become a destination for those seeking cheaper factory workers as well.
Indonesia Small-Cap ETF In Focus
The new ETF looks to follow the Market Vectors Indonesia Small Cap Index which is a rules-based, modified market cap-weighted, float adjusted benchmark. The index holds 25 securities in its basket and charges investors 61 basis points a year after waivers (also read SPDR Files For Emerging Market ETF).
Currently, this produces a fund which is heavy in financials (40%) while also affording double digit weightings to industrials, energy, and consumer staples as well. Materials and consumer discretionary firms round out the sector breakdown, meaning that segments such as tech and utilities are nowhere to be found in the product.
The new launch offers investors a nice compliment to the two large cap products that are on the market today, the Market Vectors Indonesia ETF (IDX - ETF report) and the iShares MSCI Indonesia Investable Market Index Fund (EIDO - ETF report). These products both focus in on large caps in the country, have similar expense ratios and see volumes exceed several hundred thousand shares on a regular basis.
The main difference between these two products is the concentration risk and the total number of holdings in the products. IDX holds just 43 components but spreads out assets more evenly among its top holdings. EIDO, on the other hand, has 87 stocks in its basket but puts more in its top ten holdings but it has slightly less turnover than its counterpart (read Five Cheaper ETFs You Probably Overlooked).
From a long term performance perspective, IDX is probably the better barometer as it has been around a lot longer than EIDO, having debuted in January of 2009. When looking at this fund almost since inception—the past three year period—IDX is actually the top performing non-leveraged equity ETF, having gained 274% in the time frame. Should IDXJ be able to post even a fraction of these figures over the next three years, investors are likely to see huge interest, and inflows, into this small cap version as well.
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Author is long IDX.