Van Eck, the issuer behind a number of country-specific emerging markets ETFs, recently laid the groundwork to launch what would be the industry’s first Mongolia ETF. In an SEC filing last week, the company outlined an ETF that would seek to replicate a to-be-determined index that would consist of companies domiciled and primarily listed on an exchange in Mongolia or that generates at least half of its revenue in Mongolia. The filing didn’t include an expense ratio or ticker symbol for the proposed fund [For ETF industry news, sign up for the free ETFdb Newsletter].
According to the ETF country exposure tool, there are currently four equity ETFs that include Mongolia in their top ten country allocations, though none makes a meaningful allocation. Mongolian stocks account for about 0.8% of the PowerShares Global Coal Portfolio (PKOL) and even less of the MSCI Pacific ex-Japan Index Fund (EPP) and Vanguard Pacific ETF (VPL).
First Mongolia ETF
Mongolia’s economy has traditionally been based primarily on agriculture and livestock, though the country’s abundance of natural resources and proximity to China puts it in a unique position to benefit from continued expansion in what is now the world’s second-largest economy. Mongolia’s economy collapsed in the 1990s along with the Soviet Union, as Soviet assistance had accounted for as much as one third of the country’s total GDP. Years of economic mismanagement and unwillingness to embrace economic reforms prolonged the recession, but in recent years the country has begun to move in the right direction [see 50+ All-ETF Model Portfolios].
Mongolia is now home to what has been dubbed the “Wolf economy,” a mining-based venture that is attracting investment from a number of different countries. Mongolia, a country of only about 2.5 million people, is home to massive deposits of copper, coal, iron, gold, uranium, zinc and other natural resources. It is believed to possess significant oil and rare earth metal deposits as well. According to CNN, Mongolian government officials plan to raise $25 billion in investment over the next five years.
The sole Mongolian Stock Exchange is located in Ulan Bator, Mongolia’s capital and largest city, and is one of the world’s smallest exchanges by market capitalization. As of 2010, the primary index consisted of about 335 companies with a total market cap of about $1 billion [Guide To Small Cap International ETFs].
Emerging Markets Push
Van Eck currently offers a handful of country-specific funds targeting relatively small emerging and frontier markets, including Vietnam (VNM), Egypt (EGPT), Indonesia (IDX) and Poland (PLND). With a GDP of only about $6 billion, Mongolia would be by far the smallest economy with a dedicated ETF listed on a U.S. exchange. Currently that distinction goes to New Zealand, which is accessible through ENZL. New Zealand’s economy is roughly 25 times the size of Mongolia in terms of GDP. Though small, Mongolia’s economy is growing rapidly; last year, GDP growth came in at approximately 7%, and even higher rates of expansion have been forecast in coming years.
Disclosure: No positions at time of writing.