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Malaysia ETF: the Perfect Emerging Market Fund?

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Although many emerging markets have been top growth destinations for investors, recent trends in the space have pushed many to reconsider high allocations to these regions. China is seemingly fighting a hard landing, Brazil is growing at an anemic rate, while many other nations are battling inflation and low risk tolerance levels as we head into the fall.

Yet despite this gloom, there are still a couple great spots for investors’ dollars in the emerging market universe. This may especially be the case for the Southeast country of Malaysia, a small nation of about 30 million people that is often overshadowed by other markets in the region such as Singapore and Indonesia (read Southeast Asia ETF Investing 101).

Still, although it is often overlooked, Malaysia is a perfect showcase for the broad trend of Southeast Asian market outperformance so far in 2012, despite the region’s generally heavy dependence on exports to developed nations for growth. In fact, several ETFs in this region have been among the top country ETF performers both on the year, and over the past few months as well.   

This could continue to be the case as we head into the final part of the year, especially if worries continue to build over major emerging markets like Brazil or China, forcing investors to look elsewhere for their developing market exposure. The trend could eventually lead investors into Malaysia, and the country’s main ETF, the iShares MSCI Malaysia Index Fund (EWM - Free Report) , as a way to avoid some of the main emerging market issues while also targeting an incredibly stable and dynamic market in the Southeast Asia region.

That is because Malaysia’s recent GDP report shows that the country is not only growing at a reasonable clip, but that it has a robust outlook as well. According to the Financial Times, Malaysia’s GDP growth for the most recent quarter came in at 5.4%, crushing the year-over-year growth estimate of 4.6% by economists (see Five ETFs to Buy in 2012).

If that wasn’t enough, the country also revised its first quarter growth up by 20 basis points to 4.9% y/y, while it also declared that private consumption and private investment rose by, respectively, 8.8% and 24.6% in the period. Not only that, but inflation remains extremely moderate, coming in at just 1.4% per year in the most recent reading for Malaysia.

To top off the good news for the nation, exports are still growing—albeit slowly—suggesting that the global slowdown hasn’t really hampered the nation’s growth prospects. This is especially impressive considering that exports make up nearly 60% of the nation’s GDP, implying that the products Malaysia is selling are still very much in-demand even with a global slowdown in the works.

This robust report and the central bank’s lack of worry over growth in the future, suggests a pretty impressive outlook for the Malaysian economy in the near term. Given this, the aforementioned iShares EWM could be an interesting play for investors seeking to go off the beaten path and target a nation that is still managing a solid performance in light of increasingly uncertain global economic fundamentals (read Emerging Market Small Cap ETFs: Freefall Continues).

Malaysia ETF in Focus

Investors are probably expecting the Malaysia ETF to be quite concentrated in a few sectors and thus inappropriate for many portfolios. However, this isn’t really the case for EWM and the fund does a great job of spreading out assets around the Malaysian economy.

Yet with that being said, financials do account for roughly 33% of the total, giving the product a definite tilt to financials. Still, industrials make up nearly 20% of assets, consumer companies account for 10%, staples for another 10%, and telecoms for 11.6%. This implies that there is a pretty good mix of various sectors and that consumer stocks are by no means forgotten in this iShares fund (see Three Overlooked Emerging Market ETFs).

Investors should also note that the product pays out a solid yield of nearly 3.7% on an annual basis, more than enough to defray the 52 basis point fee yearly fee. Furthermore, while EWM is overlooked by many, it still has almost a billion in AUM and volume in the million share level every day, suggesting tight bid ask spreads for the most part.

Given the solid fundamentals of the fund as well as the strong points of the Malaysian economy, the product could be a great choice for many emerging market ETF investors. Not only does EWM have a wealth of positives but the fund has outperformed broad emerging markets by nearly 4,000 basis points in the past five year period, suggesting that the ETF has been an extremely great choice for investors (also read Top Three Emerging Market Dividend ETFs For Income and Growth).

While this insane level of outperformance probably won’t continue, the robust and diversified nature of the Malaysian economy suggests that the nation still has a great deal of growth left. Thanks to this and the market beating yield, we think EWM could be a great choice for any investor who is looking for a new, and more targeted way to play strong growth trends in an often overlooked emerging market.  

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Follow @Eric Dutram on Twitter

Author is long EWM.

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