Sam Subramanian: Emerging market investments offer potential for higher returns while being highly volatile. Investors therefore include emerging markets ETFs in their ETF portfolio. A popular emerging market ETF is iShares MSCI Emerging Markets Index Fund (NYSE:EEM).
Regional emerging markets ETFs like iShares MSCI Emerging Markets Eastern Europe Index Fund (NYSE:ESR) and iShares S&P Latin America 40 Index Fund (NYSE:ILF) offer exposure to different geographic segments.
Now a new ETF has become available for investment specifically in Southeast Asia … the Global X FTSE ASEAN 40 ETF (NYSE:ASEA). The ETF seeks to track the price and yield performance of stocks included in the FTSE ASEAN 40 Index.
In 1967 Indonesia, Malaysia, the Philippines, Singapore and Thailand formed an economic bloc called the Association of Southeast Asian Nations (ASEAN) to promote economic growth through free trade amongst those countries. Since then, ASEAN has expanded and currently includes Brunei, Cambodia, Laos, Myanmar and Vietnam.
Benefits & Risks of ASEAN ETF
The Global X ASEAN ETF invests in the 40 largest companies in the five founding member nations of ASEAN. The ETF currently has the following weightings: Singapore 41%, Malaysia 33%, Indonesia 15%, Thailand 11%, and the Philippines 1%.
Southeast Asia is one of the fastest growing regions in the global economy. Singapore is considered a developed market. The economies of Indonesia, Malaysia, the Philippines and Thailand are expanding rapidly thanks to their economic liberalization policies promoting foreign direct investments, availability of skilled labor at low wages and bilateral trade with China. A fast growing affluent middle class drives up demand for a multitude of consumer goods and services.
Over 40% of Global X ASEAN ETF’s assets are invested in Singapore, posing country concentration risk. Another risk is the dependence of ASEAN countries on China. Like other emerging markets ETFs, the ASEAN ETF carries risks associated with foreign currency, higher inflation and nationalization of companies the ETF invests in.
It remains to be seen if the Global X ASEAN ETF can contend among the best etfs for 2011.
Investors can use a core and satellite strategy to build an emerging markets ETF portfolio. They can consider using the Vanguard Emerging Markets ETF (NYSE:VWO) for the core portion of the ETF portfolio. The Vanguard ETFs as well as sector and industry group index funds are designed to track a target index. VWO tracks the Morgan Stanley Capital International’s (MSCI) Emerging Markets Index.
With only 7% of its assets invested in the emerging markets of ASEAN, the Vanguard ETF offers only a limited exposure to ASEAN. Investors can use Global X ASEAN ETF as the satellite portion of their ETF portfolio. For more on ETF portfolio construction, see: Best ETF Portfolios.
Country Specific ETFs
Investors have the option of investing in country specific ETFs in ASEAN. They are iShares MSCI Indonesia Investable Market Index Fund (NYSE:EIDO), iShares MSCI Malaysia Index Fund (NYSE:EWM), iShares MSCI Philippines Investable Market Index Fund, (NYSE:EPHE), iShares MSCI Singapore Index Fund (NYSE:EWS), and iShares MSCI Thailand Investable Market Index Fund (NYSE:THD).
Dr. Sam Subramanian is Managing Principal and Chief Investment Officer of AlphaProfit Investments, LLC. He edits and publishes the AlphaProfit Sector Investors’ Newsletter™. The AlphaProfit Sector Investors’ Newsletter has received the distinction of getting ranked #1 by Hulbert Financial Digest several times. He also edits the AlphaProfit’s popular investing blog and e-letter MoneyMatters.