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Indonesia ETFs: Can the Run Continue?

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The Indonesian economy, the biggest in Southeast Asia, appears to be poised for good growth in 2013. This is largely attributable to healthy domestic consumption, a favorable investment climate and increased infrastructure development.

Low inflation and interest rates should also support economic growth, helping the country to surge higher in the years ahead. This, along with strong domestic consumption, has enabled the economy to maintain a mid-single digit GDP growth rate for the past eight years, suggesting impressive resilience for the Indonesian economy (Can Indonesia ETFs Rebound in 2013?).

In fact, the Indonesian economy has held up quite well against the global economic downturn. Firm domestic demand may be cited as the reason for the strong performance of the economy, as this was at a time when developed parts of the world were in the doldrums and providing little in terms of growth.

Moreover, its strong resiliency has encouraged foreign investment in the region. The country has experienced huge amount of foreign investment in recent years.

However, in the recent past couple of days, the nation's currency, the rupiah, has shown some weakness attributable to the country's first annual trade deficit noticed in 2012. Furthermore, with markets in the U.S. and China showing signs of recovery, the economy is again expected to witness a pickup in export demand which will eventually result in current account deficit improvement.

Also, a growing middle class is one of the factors which has contributed to the economic growth of Indonesian economy. In fact, the middle class in Indonesia is expected to double by 2020, leading to a huge consumer market in the nation (Indonesia ETFs Leading the Pack in 2013).

Cons of the economy

Although domestic investment growth will remain a key to Indonesia’s economy; however, the growth may moderate in 2013. Slower pace of imported capital goods spending is reflective of restrained growth in domestic investment.

Capital imports recorded a fall of 12.1% in January 2013. The softness in capital import growth is mainly due to weak commodity prices which resulted in a drop in investment in mining and oil sectors.

Also rising inflation remains a matter of concern for the nation. The economy reported a 20-month high inflation level of 5.3% in February while the World Bank predicts an inflation level of 5.5% for the economy in 2013 (The Key to International ETF Investing).

The World Bank has also estimated a fiscal deficit of 1.9 percent of Indonesia's GDP in 2013 due to higher projected fuel subsidy spending and potentially weaker revenue collection.

Poor infrastructure is yet another factor which may hamper the economy’s growth. Improving the level, quality and efficiency of infrastructure investment can help to unlock the economic benefits of urban agglomerations and support the quality of service delivery.

Indonesian ETFs

Due in part to these issues, Indonesia ETFs were underperformers in 2012. While most of Southeast Asia’s ETFs recorded a strong performance last year, Indonesian ETFs ended up in the red or flat.

However, 2013 has proven to be a gamechanger for these Indonesian ETFs. Performance of Indonesian ETFs excelled in comparison to other Southeast Asia ETFs since the start of 2013, allowing the funds to shed their losses from 2012.

Currently, there are three choices for investors seeking to make a play on Indonesian securities. The Market Vectors Indonesia ETF (IDX - Free Report) , the iShares MSCI Indonesia Investable Market Index Fund (EIDO - Free Report) and Market Vectors Indonesia Small-Cap ETF .

All three had a great start in 2013, posting solid growth in the year-to date period, and erasing the poor memories from 2012. Below, we highlight some of the key differences between the three for investors seeking exposure to this still impressive emerging market:

Market Vectors Indonesia Small-Cap ETF

Among the top performers, Indonesian ETFs put up a remarkable show in the first quarter. IDXJ recorded an impressive year-to-date gain of 26.07%. After a dismal performance in 2012, the recovery in the New Year has been striking (Top Performing ETFs of the First Quarter).

As the name suggests, the recently launched IDXJ offers a targeted exposure to the small-cap segment of the Indonesian market thereby providing a better opportunity to tap domestic growth.

IDXJ manages an asset base of $10.1 million and provides exposure to 28 small-cap securities of Indonesia. The fund charges an expense ratio of 61 basis points annually.

The ETF appears to be concentrated in the top ten holdings to which it allocates a hefty 58.23% of the asset base. Among sector allocations, Financials dominates the list with a 39% share while Industrials and Consumer Staples get the next two positions with allocations of 27.1% and 14.5% of the asset base, respectively.

iShares MSCI Indonesia Investable Market Index Fund (EIDO - Free Report)

EIDO provides exposure to large cap segment of the Indonesian economy. This fund also has seen double digit gains this year although the returns were much lower than the small cap fund. EIDO year-to date gains stand at 10.71%, so still an impressive figure, especially when compared to other emerging markets (4 Best ETF Strategies for 2013).

The fund provides access to 93 Indonesian securities in which the fund invests an asset base of $568.4 million. The fund charges an expense ratio of 60 basis points annually.

EIDO has a concentrated holding pattern with almost 60% of the asset base in the top ten holdings. For sector holdings, the fund has invested in double digits in Financials, Consumer Discretionary, Consumer Staples and Telecommunications.

Market Vectors Indonesia ETF (IDX - Free Report)

This is another fund in the large cap segment. Although returns from IDX are the lowest on the list, the ETF’s bounce back has been quite commendable. The fund’s year-to date gains stand at 8.31%.

The fund provides exposure to 41 large cap securities of Indonesia. In this portfolio of securities, the fund invests an asset base of $459 million. The fund charges a fee of 57 basis points.

Concentration risk is high in this fund. The top ten holdings of the fund influence the IDX’s performance to the extent of 57.6%. Among sector holdings, financials, consumer discretionary and consumer staples enjoy double digit allocation.

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