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ETF News And Commentary

By and large, Indonesia ETFs were a huge disappointment in 2012. These once high flying ETFs struggled compared to their peers on the year, finishing flat or in the red while broad emerging market ETFs—and especially those in Southeast Asia—soared higher in the time frame.

In fact, country ETFs that follow markets like Thailand (THD), Singapore (EWS), or the Philippines (EPHE) jumped higher on the year by more than 20% each, putting products targeting Indonesia to shame. However, there has been somewhat of a reversal to start 2013 as Indonesia ETFs have stormed higher to begin the new year (see Can Indonesia ETFs Rebound in 2013?).

Indonesia ETFs in Focus

Currently, there are three choices for investors seeking to make a play on Indonesian securities. Two are in the large cap space—the Market Vectors Indonesia ETF (IDX - ETF report) and the iShares MSCI Indonesia Investable Market Index Fund (EIDO - ETF report)—and a small cap option as well, the Market Vectors Indonesia Small Cap ETF (IDXJ - ETF report).

All three have bolted to a great start in 2013, with all up double digits already on the year. Furthermore, the unloved small cap product IDXJ, has actually added nearly 30% in the time frame, crushing pretty much every other segment in the world during Q1.

What Gives?

This incredible reversal is due to a few important reasons. First, the country’s currency, the rupiah, has largely stabilized against the dollar during the last few months. This is a sharp change from late 2012 in which the greenback strengthened heavily against the Indonesian currency.

This is very important for U.S. investors as it helps to promote strong returns when investors repatriate assets back into dollars. After all, most Indonesian securities in the products highlighted above are in rupiahs, so a weakened currency hurts the dollar-denominated return (see 4 Best ETF Strategies for 2013).

Beyond that, investors have looked to cheaper emerging markets this year, and especially ones that haven’t been as bid up in the euphoria of late 2012. Indonesian stocks are prime examples of this, so many have piqued investor interest to start the year.

Lastly, there has also been some positive news on the policy front, and particularly with regards to the country’s inflation fighting capabilities. A new central bank governor was recently appointed and he has vowed to keep inflation low, declaring that it the bank would ‘guard the rupiah stability in line with its fundamentals’.

This pledge is viewed as a positive by many, as the rupiah was the worst performing currency out of Asia’s 10 most-traded (besides the yen) last year, so some stability could go along way to returning confidence. This could be especially true if inflation can be kept in check while still maintaining a solid rate of growth (read Emerging Market ETFs to Soar in 2013?).

Indonesia ETFs in Focus

For the reasons outlined above, investing in Indonesian ETFs is looking quite promising this year. The country remains very much consumer driven, and recent policy shifts look to aid in a robust recovery on this front.

While it is true that there is some concern over lending rates, foreign currency reserves, and fuel subsidies, the future is still undeniably bright for the surging emerging market. The country still has incredible growth potential, and unlike many of its neighbors, is still a reasonable value at this time (see Emerging Market Dividend ETFs).

Thanks to this, we currently have a bullish outlook on the top Indonesian ETFs, including a Zacks ETF Rank of 1 or ‘Strong Buy’ on IDX, and a Rank of 2 or ‘Buy’ for EIDO. Add in IDXJ’s incredible performance (but high levels of volatility) and it appears as though investors can’t really go wrong in this corner of the fund world, suggesting now is a great time to give Indonesian ETFs a closer look.

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Author is long IDX

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