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Turkey ETF has been one of the best performing emerging markets ETFs this year--up more than 48% year-to-date, as global investors continue to pour money into the economy that has shown remarkable resilience to the events in the Euro-zone.
Earlier this month, Fitch Ratings upgraded Turkey to investment grade. According to the rating agency the upgrade resulted from “easing in near-term macro-financial risks and underlying credit strengths including a moderate and declining government debt burden, a sound banking system, favorable medium-term growth prospects and a relatively wealthy and diverse economy”.
Moody’s and S&P currently rate Turkey one and two notches below investment grade respectively. (Buy These Emerging Asia ETFs to Beat China, India)
According to some estimates, Turkey may receive an extra $100 billion over the next 10 years if it qualifies as an investment grade country for the purpose of institutional funds (investment grade rating from two out of three big rating agencies).
Turkey stock market is up more than 38% year-to-date. The currency is up about 6% against the dollar, despite “verbal intervention” by the central bank. (Access the $30 trillion Consumer Market with These ETFs)
As a result of significant market reforms introduced after the financial crisis of 2001, the country has witnessed excellent growth in the last decade.
The economy grew at an impressive 8.5% in 2011 but is expected to slow down to 3.0% in 2012 and then rise slightly to 3.5% in 2013, per IMF.
Favorable demographics (median age ~26 years) and a stable political system further support the country’s growth story. (Invest like Warren Buffett with These ETFs)
Despite solid growth potential, the economy faces some serious challenges from its growing current account deficit, high inflation and low savings rate.
The deficit is mainly being financed by volatile short-term capital flows. Further, energy imports account for about half of its current account deficit, leaving the country vulnerable to increase in oil prices.
The policymakers are trying to trying to rebalance its earlier domestic demand driven growth model and trying to focus on exports.
The country did have some success on that front as the exports to the Middle East increased substantially last quarter while the imports came down.
The central bank now expects the inflation rate to fall below 7.4% by the end of the current year. As inflation inched lower, the central bank lowered its interest-rate corridor for overnight lending rates for a second month in a row.
Due to the structural imbalances mentioned above, the stock market and the currency have been very volatile in the recent past. Turkish Lira was down 17.5% and the ETF was down 36.3% last year. (Volatility ETFs: Three Factors Investors Must Know)
Further, if fiscal cliff worries rise, global investors may in general adopt a more risk-averse attitude. However for longer-term investors, who are willing to stomach the volatility, this ETF can be very rewarding investment.
TUR tracks the MSCI Turkey Market Index, which is a capitalization weighted index that aims to capture 99% of the Turkey equity market. The fund was launched in March 2008 and has attracted about $614 million in AUM so far.
In terms of sector exposure, financials constitute almost half (50%) of the assets, followed by consumer staples (13%) and industrials (12%). Though the ETF currently has 98 holdings, it is top-heavy, with the top 10 holdings accounting for almost 61% of the assets.
As the Turkey’s banks are adequately capitalized and the regulatory norms are in compliance with the International norms, the focus on the financials is a positive feature of the ETF. TUR charges 59 basis points in expenses and pays out a yield of 1.89% currently.
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