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Turkey ETF is the best performing country ETFs this year--up more than 63% 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.
Last month, Fitch Ratings upgraded Turkey to investment grade dut to “easing in near-term macro-financial risks and underlying credit strengths".
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. Nevertheless, the economy has been facing a severe challenge in the form of high current account deficit, rising inflation and its severe dependence on global energy imports. (see Crude Oil ETF Investing 101)
In fact, energy imports account for a lion’s share of the total imports of the economy. Thus the economy faces a serious threat from any slight rise in oil and natural gas prices (which are at depressed levels for now). In fact, the Central Bank of the Republic of Turkey stated that even a $10 increase in oil prices per barrel would result in a 40 basis point addition to the inflation rate and a 50 basis point reduction in year-on-year GDP growth. (see-Time to stuff Turkey ETF into your portfolio)
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.
Nevertheless, unlike other emerging market counterparts, the economy is not dependent on commodity exports. To name a few, nations like Brazil and Russia are largely dependent of commodity exports to China. The situation for developed nations like Australia and New Zealand is similar. In fact, these nations are highly correlated to the Chinese economy, mainly thanks to a majority of their exports to the Asian giant. (read Peru ETF Investing 101)
Turkey, however, is not. This makes the economy independent of the negative impacts from a Chinese slowdown (which most commodity export oriented nations are facing in the current circumstances). In fact the Turkish growth is a function of rising consumption by its rising middle class population.
However, the Turkish economy is highly dependent of foreign capital flows (in the form of direct investments) which are a major contributor to its economic growth. Going forward, the economy could face challenges if it fails to attract enough foreign inflows due to strict regulation. (read Uncertain about the Economy? Try Market Neutral ETFs)
Nevertheless, Turkey continues to be a major destination for investors seeking an emerging market exposure, mainly thanks to its robust growth rate coupled with low levels of correlation with the developed markets.
The iShares MSCI Turkey Investable Market ETF (TUR) was launched in March of 2008, and is pretty much the only option available to the investors seeking a pure play exposure in the Turkish equity space. TUR has been able to amass more than $600 million in its asset base so far. The ETF sports a distribution yield of 2.07% and charges 59 basis points in fees and expenses.
TUR has returned 17.5% for the one year period as on 30th September 2012. The ETF had a fantastic start to the year adding about 28% for the first quarter ending March 2012. However, like most equity ETFs it had a lackluster run the subsequent quarter. Still, it didn’t fetch negative returns but was almost flat adding around 81 basis points. In the third quarter ending September 2012, TUR is up by 7.5% (see more in the Zacks ETF Center).
The ETF could be a good choice for investors seeking international diversification as it has a three year R-Squared value of just 60% with the S&P 500 which implies that it is not very strongly correlated with the U.S equity market performance.
On the contrary, domestic consumption driven sectors like Financials (49.29%), Consumer Staples (12.82%), Industrials (11.77%) and Telecommunications (9.28%) comprise a major chunk of its portfolio. This probably gives us a broad representation of the Turkish economy as its growth story is largely fuelled by domestic consumption rather than international exports. (read Invest like Goldman With These Commodity ETFs)
The ETF holds 99 securities in all; however it fails to diversify as the top 10 companies in its portfolio account for almost 63% of its total assets. The product does about 202,000 shares daily.
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