Small Cap Indonesia ETF Debuts (IDXJ)

by on March 21, 2012 | ETFs Mentioned:

Van Eck, the firm that rolled out the first Indonesia ETF a little more than three years ago, introduced a complementary ETF today that will target small cap stocks in the emerging Asian economy. The Market Vectors Indonesia Small-Cap ETF (IDXJ) began trading on the NYSE Arca on Wednesday, becoming the first ETF to offer targeted exposure to small cap Indonesian stocks. The new ETF will seek to replicate the Market Vectors Indonesia Small-Cap Index, a benchmark that includes small cap companies that are domiciled in Indonesia or that generate the majority of their revenues in Indonesia. At the end of February, the underlying index consisted of about 27 constituents with an average market cap just below $700 million. 

Under The Hood

The small cap Indonesia ETF will be relatively balanced; the largest individual allocations make up about 8% of assets, and the top 10 account for about 55%. The index to which IDXJ is linked will have a hefty allocation to the financial sector, which makes up about 40% of assets. Other sectors represented include industrials (18%), energy (16%), and consumer staples (16%). The consumer discretionary sector makes up another 5% of holdings. The index has a P/E ratio of about 14x and a price-to-book ratio of only about 1.2x. 

About 80% of the IDX portfolio consists of large cap stocks with a market cap in excess of $5 billion. The remainder is primarily in mid caps, with small caps making up only about 2% of the fund. IDXJ and IDX will be generally similar in terms of the sector breakdown; IDX features a significant tilt towards the financials sector, which makes up about 29% of assets. Other big allocations are made to consumer staples (15%) and energy (15%) in the large cap ETF. 

IDX currently has about $530 million in assets under management, while the iShares Indonesia Investable Market Index Fund (EIDO) has about $275 million. IDXJ will charge an expense ratio of 0.61%. IDX charges 0.60%, while EIDO has an expense ratio of 0.59% [see the IDXJ fact sheet]. 

Case For Indonesia

Indonesia is home to close to 250 million people, making it one of the most populous countries in the world (currently fourth, behind China, India, and the U.S.). The Southeast Asian economy has been riding a wave of pro-growth fiscal and monetary policies in recent years that has pushed per capita GDP significantly higher. That metric is now positioned to cross the $3,000 mark, a level at which many developing economies see drops in savings rates and surges in consumption of goods and services. 

Indonesia recently revised its growth projection for 2012, now believing that GDP will expand at a rate of 6.5% to 6.7% this year. The country’s chief economics minister also raised the level of expected inflation significantly, to the 6% to 7% range from a previous estimate of 5.3%. “Indonesia has grown rapidly over the past several years and we believe that it is well positioned to continue to prosper, with an economy supported by rising domestic consumption and higher levels of disposable income,” said Ed Lopez, Marketing Director at Market Vectors ETFs. “In our view, smaller cap companies that generate the majority of their revenues in the local market provide the best way for investors to gain exposure to the domestic growth story.”

Investors who utilize broad-based emerging markets ETFs as a primary source of international equity exposure likely have very small weightings afforded to Indonesia. Despite being one of the largest and most populous countries in the world, Indonesia is generally overlooked in many emerging markets ETFs. The country makes up less than 3% of the iShares MSCI Emerging Markets ETF (EEM), less than half the weights given to economies such as South Africa and Russia. That’s been an unfortunate weighting for the past several years as Indonesia’s economy has accelerated. IDX has been one of the best ETF performers since markets bottomed out in 2009, and has now gained close to 300% over the past three years. 

Small Cap Emerging Markets ETFs

Van Eck has been one of the pioneers in developing ETFs that offer exposure to small cap stocks in emerging markets, an asset class that is often overlooked in investor portfolios. In addition to IDXJ, the company also offers ETFs targeting small cap companies in Brazil (BRF), Russia (RSXJ), India (SCIF), and Latin America (LATM). 

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Disclosure: Long BRF.