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The emerging Asian economies have long provided investors the flexibility to shift focus from developed markets in their quest for high levels of diversification. Not only have these markets provided relatively uncorrelated returns, but they also offer up outsized growth potential and access to booming economies.

One interesting but often overlooked economy is that of Indonesia. Like other emerging economies the Indonesian economy is characterized by high economic growth rates, rising middle class population, increase in domestic consumption and a high rate of inflation.

In fact, even in these times of economic uncertainty, the Indonesian economy has managed to grow at an impressive rate and is even expected to grow at an accelerated pace going forward (as per IMF forecasts) (see Buy These Emerging Asia ETFs to Beat China, India).

Also, on the inflation front, the Consumer Price Index (CPI) increased to 4.61% in October 2012, from 4.31% the previous month. However, over the past one and a half years the economy has done well in reducing the inflation from well over 6% in April 2011 (data as per Bank Indonesia).

With reducing debt to GDP ratio and its recent upgrade in sovereign rating to investment grade status, the economy is sure to attract foreign capital flows in the form of portfolio flows which is most likely to boost the stock markets. Furthermore, thanks to its focus on domestic consumption, the Indonesian economy could be better prepared than most if Western nations crumble once more (read Forget China, Buy These Emerging Market ETFs Instead).

Given this, a look at a top ranked Indonesian ETF could be the way to target the best of the emerging market segment, with lower overall risk. One way to find a top ranked ETF in the emerging market world is by using the Zacks ETF Ranking system.

About the Zacks ETF Rank

The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook for the underlying region, industry, sector, style box, or asset class. Our proprietary methodology also takes into account the risk preferences of investors. ETFs are ranked on a scale of 1 (Strong Buy) to 5 (Strong Sell) while they also receive one of three risk ratings, namely Low, Medium, or High.

The aim of our models is to select the best ETFs within each risk category. We assign each ETF one of five ranks within each risk bucket. Thus, the Zacks Rank reflects the expected return of an ETF relative to other products with a similar level of risk (see more in the Zacks ETF Center).

For investors seeking to apply this methodology to their portfolio in the Indonesian market, we have taken a closer look at the top ranked IDX below:

Market Vectors Indonesia ETF (IDX)

Launched in January of 2009, Market Vectors Indonesia Fund (IDX - ETF report) is a passively managed exchange traded fund (ETF) designed to provide broad exposure to the Indonesian equity market with a focus on resembling the risk-return characteristics of large cap equities.

IDX seeks to match the performance and yield of the Market Vectors Indonesia Index before fees and expenses. The index measures the performance of stocks listed in the Indonesian stock markets and is composed of 40 large cap stocks.

IDX provides an opportunity for diversification since the ETF is not strongly correlated with the S&P 500 index as indicated by an R-Squared value of 56% (read Do Country ETFs Really Provide Diversification?). The ETF charges a somewhat high 57 basis points in fees and expenses.

However, it has attracted a good amount of inflow in its asset base which stands at $412.60 million. This coupled with a high average daily volume of 239,000 shares has resulted in a reduced bid-ask spread for the product.

This ETF is appropriate for investors seeking a broad exposure to Indonesian equity markets with a focus on large cap equities with a medium to long term view.  However, investors should remember that like any other emerging market, investing in Indonesian equities requires at least a modest appetite for risk.

Similar to most emerging Asian nations, growth in the Indonesian economy had also slowed down during the previous fiscal year. However, increased domestic consumption from rising middle class populations will be a key positive for the Indonesian economy going forward (see Forget the BRIC ETFs, Focus on the PICKs).

From a sector perspective, Market Vectors Indonesia ETF relies heavily on Financials (31%), Consumer Staples (15.60%), Consumer Discretionary (12.80%), Materials (10.9%) and Energy (10.30%) with double digit exposure.

Industrials, Utilities and Healthcare are sectors with least allocation. From an individual holdings point of view, the ETF holds 40 securities with almost 57% allocation to its top 10 holdings.

IDX got off to a good start in 2012, returning almost 5% in the quarter ending March 2012. However, the ETF slumped by 8% in the subsequent quarter. Nevertheless, the ETF was able to erase some of the losses on a year till date basis, mainly thanks to the restored confidence of investors in the riskier market segments.

IDX has been relatively flat returning a paltry 4 basis points for the one year period as on 31st October 2012. IDX has hit a low of $24.20 and 52-week high of $30.90. The fund has a high volatility as measured by its annualized standard deviation of 30.62%, however, it currently has a Zacks Rank of 1 or ‘Strong Buy’.

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