Forget BRIC ETFs: Look To VISTA Nations For Better Opportunities

by on October 24, 2011 | ETFs Mentioned:

One of the biggest stories in the investing world over the past few years as been the rise of emerging markets. These countries continue to grow at an impressive clip and are in a much better position from a fiscal perspective than their developed market counterparts. Furthermore, the countries often have more favorable demographics than fully-industrialized nations, suggesting that more gains could be had in the future as well. Unfortunately, many of these trends have become painfully obvious to pretty much every investor, causing many to pile into funds such as EEM or VWO for broad based exposure. Beyond these two funds, another popular choice has been to take a closer look at the BRIC bloc of countries which represents four large emerging markets, Brazil, Russia, India, and China.

These four nations have, thanks to their large size and domination of key industries, attracted the lion’s share of assets by most investors looking for exposure to these key regions. Thanks to widespread investment, asset prices have surged in many of these nations, pushing P/E multiples and expectation sharply higher. Correlations to broad markets have also increased as the funds tracking these markets tend to get lumped into the broad ‘risk-on’ trade and tend to benefit more than most when market sentiment is surging [ETFs For The Next 11 Economies].

Due to these trends, many investors would be wise to take a closer look at a number of other, smaller markets that can offer exposure to emerging markets while at same time flying under the radar of major institutional investors. While there are any number of countries worth considering, an increasingly popular choice in recent months has been what is known as the VISTA bloc of countries.

The VISTA bloc, which represents Vietnam, Indonesia, South Africa, Turkey, and Argentina, is a group of emerging markets that, while are obviously not on the same size level as gigantic nations such as India and China, are large markets that are poised to grow quickly in the coming years. These nations generally have a young growing labor force, political stability, and surging levels of consumption. Unfortunately, the nations are usually less developed from both a financial and domestic perspective than their BRIC cousins as VISTA nations generally have weaker levels of investment in infrastructure and greater amounts of stock market volatility, due in large part to their relatively undeveloped nature [Beyond The BRIC: 10 Country Specific Emerging Market ETFs] .

Investors should also note that because the countries do not have as deep of markets as their BRIC counterparts, they are often overlooked by many investors who prefer to stick to the largest players in the space. Given the recent trends towards high levels of correlation and the relatively tapped out nature of the BRICs, many investors may want to give a second look to these VISTA nations as a new way to round out exposure to emerging markets. For these investors looking for funds to play the bloc, we have highlighted ETF options for each of the five countries below:

Vietnam

Vietnam is a rapidly developing market in Southeast Asia and is currently one of the 15 largest countries in the world by population. The nation is, thanks to its low cost of labor, a major center of manufacturing in the region while a great deal of investment also goes into the more basic industries of commodity production as well. Vietnam is also helped by its demographic profile as more than half of the population is younger than 25, and thus, is approaching the peak of their earnings potential in the next few years [see Country ETFs With Rock Bottom Unemployment Rates].

For risks, the country faces significant obstacles in terms of inflation and corruption going forward. The rate of price increases is well into the double digits and currency devaluations haven’t helped this trend. Additionally, the nation ranks near the bottom third for Transparency International’s Corruption Perceptions Index, suggesting that the nation could offer significant rewards but also huge risks as well.

The only real way to play the closed off Vietnamese stock market is with the Market Vectors Vietnam ETF (VNM) from Van Eck. The fund tracks the Market Vectors Vietnam Index which provides exposure to publicly traded companies that, predominantly, are domiciled and primarily listed in Vietnam and which generate at least 50% of their revenues from Vietnam. The fund is skewed towards financials and energy firms which make up, respectively, 40.8% and 25.8% of the fund, while industrials and materials combine for another 20%. In terms of capitalization exposure, mid and small caps dominate as just 14.7% of the fund is in large caps. VNM charges investors 76 basis points for its services and the fund has had a rough time in 2011, losing close to 32.7% since the start of the year [read Can The Vietnam ETF Bounce Back From Currency Devaluation?].

Indonesia

The second Southeast Asian country on the list, Indonesia could one day grow to rival the BRICs themselves in terms of economic importance. In fact, Indonesia actually has the fourth most people out of any nation on Earth at a little over 235 million. Despite this vast population, gross GDP is a little over one trillion, meaning that the average GDP per person hovers around $4,400 in purchasing power parity terms. This low level actually could be a good thing for the nation as it makes it a low cost destination for manufacturing firms throughout the world while still being close to key developed markets such as Australia, Singapore, and the rest of East Asia [Talking Indonesia ETFs With Van Eck's Ed Kuczma].

Despite these many positives, the country does have a few challenges ahead. Inflation has been a historical problem in the nation and at close to 7% a year, is continuing to impact broad markets and especially Indonesia’s many very poor citizens. Furthermore, much like other rapidly emerging nations, a huge disparity is beginning to build between those in the major cities, such as Jakarta, and those in rural areas who have not benefited from the rapid economic expansion. This will eventually have to be dealt with and could cause some turmoil in the years ahead.

There are currently two ways to play the Indonesian market with ETFs, the Market Vectors Indonesia Index ETF (IDX) and the MSCI Indonesia Investable Market Index Fund (EIDO) from iShares. Both funds offer excellent exposure to the country, although they do it in very different ways. EIDO holds almost two times as many securities as its Van Eck counterpart but the fund has more of its assets in its top ten holdings. In terms of sector exposure, both give their top weightings to financials followed by basic materials, while consumer firms make up at least 20% in both products as well [Pro Members can see the Analyst Take here].

In terms of performance, both funds have been beaten down in September but have held up better than most of their counterparts in the space so far in 2011. In fact, IDX and EIDO are currently leading the Emerging Markets ETFdb Category in terms of year-to-date performance by a pretty sizable margin [see What Slowdown? Indonesia ETFs Hold Their Ground In Global Crisis].

South Africa

The key to the South African economy always has been and continues to be the mining sector. The country is one of the biggest exporters of gold, platinum, and diamonds and it also has a vast wealth of other smaller metals as well. Big events such as the 2010 World Cup have also helped to showcase the country’s potential from a tourism standpoint, and demonstrate the nation’s ability to rapidly build massive infrastructure projects. The country also has a surprisingly well developed financial sector which allows the country to be the hub of Sub-Saharan African trade and investment. This also looks to help diversify the economy beyond the primary industries and expand the nation into more ‘knowledge’ based sectors [Emerging Market ETF Investing: Beyond The BRIC].

Although the nation might have vast mineral wealth, a number of problems are beginning to build in the economy. According to the CIA World Factbook, the unemployment rate in South Africa is nearly 25% while the youth unemployment level is approaching 50%. Obviously, with such a huge portion of the population not working, and an equally large portion living in incredible levels of poverty, civil unrest cannot be ruled out, especially considering the vast income disparity in the nation.

The main way to tap into the South African equity market is with iShares’ MSCI South Africa Index Fund (EZA). The fund is extremely popular with investors, as close to $460 million is under management and average volume approaches 300,000 shares a day. Top holdings in this product include materials and financials, which both make up 25% of holdings, while telecom and consumer discretionary make up 14.4% and 13.4%, respectively [A Look At South Africa ETF Options].

Although the product has been under pressure as of late, losing 15.7% year-to-date, the fund has performed much better from a longer term perspective, gaining 47.1% in the trailing five years. Furthermore, investors should note that the product pays out an impressive dividend yield for an emerging market at close to 2.7% while charging just 61 basis points in fees, making it one of the lower cost products in the space [see charts of EZA here].

Turkey

Turkey’s economy has held up surprisingly well in the financial crisis as the country’s banking system remains well positioned even with the turmoil afflicting many of its neighbors.  Debt as a percentage of GDP also remains in check while the budget deficit, at under 4%, is manageable by most metrics. Turkey also has a pretty good demographic profile, especially compared to EU countries, and could see further gains as its consumer economy expands in the years ahead.

Unlike many nations on the list, Turkey has a high current account deficit, importing close to $50 billion more than it exports. Petrochemicals make up a large percentage of these imports so if the global market sees more oil shocks it could especially hurt Turkey. Inflation is also a growing problem and given the turmoil in many of its neighbors–Greece, Iran, Iraq, Syria– one has to consider geopolitical issues going forward as well [read Surprise Rate Cut Sinks Turkey ETF].

Although Turkey makes its way into a number of regional funds, such as the Emerging Europe ETF (GUR), there is only one way to access the country straddling the Bosporus with an ETF, the iShares MSCI Turkey Investable Market Index Fund (TUR). The fund tracks the MSCI Turkey Investable Market Index which gives exposure to just over 100 Turkish companies. Fees are reasonable at 61 basis points a year, but the exposure is heavily tilted towards financials which make up close to 50% of total assets. Beyond this heavy banking exposure, three sectors make up at least 10% of total assets including; consumer staples, industrials, and telecom [Compare TUR to GUR here].

Like many emerging markets this year, TUR has been under significant pressure and has declined by nearly 24.2% since the year started. With that being said, TUR is up 55% over the trailing three years and the fund’s portfolio seems well positioned for growth as the PE ratio is just under 10.1, suggesting a plethora of beaten down securities may be in the fund’s holdings [see What's Crushing The Turkey ETF?].

Argentina

Argentina is a relatively large economy in South America, second only to Brazil on the continent in terms of total GDP (PPP). The country has greatly benefited from rising demand for many of its agricultural exports and is currently running  a modest account surplus. Demand has been especially high for the country’s meat and soybeans, helping to give the economy a nice kick in these otherwise uncertain times. Argentina has also benefited from its large oil and natural gas reserves, exporting them to the other high growth economies in the region.

In terms of downsides, there are several for this troubled nation. In addition to high levels of unemployment, Argentina is struggling with ultra-high levels of inflation. By some estimates, the rate of price increases is the second highest in the world, trailing only the economic basket case of Venezuela. In fact, inflation is estimated to be hovering around 30% while government expenditures aren’t exactly helping to cool the inflation fires either. Unless the country can get this under control in the near future, investors could see more turmoil strike the nation, much like it did a little over a decade ago [Focus On Latin America ETFs: Q&A With Bruno del Ama].

Despite the vast size of the country and the growing interest in Latin America investments, Argentina doesn’t find its way into many ETFs except for one, the FTSE Argentina 20 ETF (ARGT) from Global X.  The fund tracks the FTSE Argentina 20 Index which is designed to measure performance of the top 20 companies within the investable universe of Argentina-domiciled companies or companies that have substantial revenues or assets in Argentina, as defined by FTSE. Current top holdings go towards the materials (31%), financials (22.6%), and oil sectors (15%), while telecom and consumer staples make up double digit allocations as well. The fees are somewhat high at 0.75% but as stated previously, the fund is one of the few choices investors have when it comes to gaining exposure to the major Latin American economy [see more on ARGT's Fact Sheet].

Unfortunately for investors who bought into this fund earlier in the year, the product has so far failed to produce sold returns, sinking by nearly 27.1% in just six months time. However, investors should note that this has pushed PE ratios down on the portfolio to an ultra-low 8.9, suggesting that long term investors might see some significant value in buying into this fund sooner rather than later.

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Disclosure: Long IDX, EZA, VWO.