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Thailand ETF Slips on Rate Cut

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Given the recent rate cuts by Europe, India, Australia, Israel, South Korea and Turkey, Thailand has no choice but to catch up with this trend in order to boost its economic growth and guard against appreciation of baht.

Thailand, the second most populous Southeast Asian country, is one of the more resilient economies compared with its Asian peers with regards to the risk and headwinds from the US and Europe. The economy has led the way in the Southeast Asian markets in 2012 and has managed to grow at an impressive rate even during economic uncertainty.

However, when the other economies gained strength this year, Thailand gave the impression that its economy may be lagging somewhat (read: Can Anything Stop These Soaring Southeast Asia ETFs?).

What Went Wrong?

The Thai economy grew only 5.3% in the first quarter, below the expected 6% and much lower than 19.1% growth in the previous quarter. Like some other Asian nations, Thailand was hurt by weak exports and tepid domestic consumption.

Last week, the government of Thailand reduced the GDP forecast for the economy from 4.5%–5.5% to 4.2%–5.2% for 2013. It also slashed the 2013 export growth target to 7.6% from 11%.  This comes in the wake of a strong currency, baht, which is making exports expensive.

In fact, the baht has appreciated as much as 6% against the U.S. dollar so far in the year, though it has fallen a bit in recent days due to a strong U.S. dollar (read: Is the Dollar ETF About to Surge?).

In this environment of slow growth and a strengthening currency, the central bank of Thailand took the initiative of cutting the benchmark interest rate in order to boost the country’s economy, which is heavily dependent on exports for growth. This was the first cut made by the bank this year, pushing the rate down to 2.50% from 2.75%.

ETF Angle

Investors have only the pure play option – iShares MSCI Thailand Investable Market Index ETF (THD - Free Report) – in the space, which provides broad exposure to Thailand equities. Though the Thailand ETF has been among the best performing ETFs in the Southeast Asia space gaining nearly 12% in the year-to-date timeframe, the rate cut has pushed THD down by nearly 2% in a single trading day.

The product seeks to match the price and yield of the MSCI Thailand Investable Market Index, before fees and expenses. Holding 94 stocks in its basket, the fund is still somewhat concentrated from both a sector and an individual security perspective.

Financial comprises roughly two-fifths of the total assets while energy companies make up another fifth. Beyond this, materials, telecoms and consumer staples round out the rest of the top five, making up a combined 28% (read: Two Sector ETFs Posting Incredible Gains). From an individual holdings perspective, the product puts about 51% of assets in top 10 holdings and focuses on large cap securities.

The product has managed assets of over $1 billion so far this year. The fund has a pretty solid level of average daily volume, suggesting that bid/ask spreads are relatively tight and that total costs will not come in much higher than the 60 bps expense ratio. THD has an annual yield of 1.59% (see more in the Zacks ETF Center).

Bottom Line

Despite the fund’s relatively heavy concentration, the emerging market ETF still could be a solid choice for investors. THD currently has a Zacks Rank # 1 or Strong Buy rating, suggesting it would continue to outperform over the next one year period (read: Zacks ETF Rank Guide).

The ETF has been on the downside in the last few days due to sluggish first quarter growth and rate cuts. In fact, this poor performance has sent the fund’s return below the (SPY - Free Report) year-to-date.

While the interest rate cut was widely expected, many were hoping for a 50 bps reduction instead. So, at least part of the reaction could be due to the lack of a bigger cut to hold down the baht.

Still, we believe that lower interest rates will take at least a few months to improve the economy, and that THD could face some weakness in the near term. Beyond that though, the fund could rise once more, and continue to lead the Southeast Asia ETF world higher.

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