ETFs that tap into Southeast Asia

As emerging markets fall back into favor, several funds offer exposure to this growing region.

By TheStreet Staff Mar 29, 2011 10:27AM

Image: Singapore (© Bill Lai/Corbis)By Don Dion, TheStreet


Many emerging nations got off to a rough start this year as issues such as the political protests sweeping through the Middle East and North Africa and rapidly rising food prices tested investor nerves and drove many traders into the comfort of the developed world.


Now, however, as we head into the second quarter, some of these recently unloved countries have begun to fall back into favor. In the weeks ahead, investors may want to keep on their radar ETFs designed to track these nations. In the event that strength continues, they may present attractive investment opportunities.


Southeast Asian countries have become an area of focus as investors take cautious steps back into emerging markets. The Market Vectors Indonesia ETF (IDX) and the iShares MSCI Thailand Investable Market Index Fund (THD) are two funds that risk-tolerant investors may want to keep a close watch on. Both have staged impressive rallies in recent weeks, recovering back to levels seen prior to their drops early in the year.


These notable rallies have helped IDX and THD power higher in our short-term momentum rankings.

While their gains have been impressive, it is important to remember that frontier nations such as Indonesia and Thailand are naturally prone to daily volatile action. Therefore, for risk-tolerant investors, IDX and THD are best utilized as small, focused aspects of a well- diversified exposure. Conservative investors, meanwhile, may want to look elsewhere for Southeast Asian exposure.


Unfortunately it is difficult to locate ETFs that offer substantial diversified exposure to this part of globe. Currently, the Global X FTSE ASEAN 40 ETF (ASEA) is the only fund that offers truly dedicated exposure to these nations. The fund is still new, however, and during its short lifespan it has struggled to garner adequate attention from investors.


Other, more liquid options such as the SPDR S&P Emerging Asia Pacific ETF (GMF) and iShares MSCI All Country Asia ex Japan Fund  (AAXJ) provide investors with exposure to Thailand, Indonesia, Malaysia and Singapore.


However, in both cases, they are heavily focused on major emerging markets such as China and India. Those two nations represent 54% and 36% of GMF and AAXJ, respectively.


Although they are considered emerging nations, India and China will likely perform in a more stable manner over the long run. This may limit the upside potential of the fund.


In the absence of a better option, AAXJ is likely the best tool for risk-averse investors looking specifically for diversified Southeast Asian exposure.

AAXJ's index is composed of more than 200 individual holdings. By spreading its assets across such a wide pool, AAXJ will not be reliant on the performance of a single position.


Top holdings include Samsung, Taiwan Semiconductor Manufacturing (TSM), Shinhan Financial Group, Chungwa Telecom and KB Financial Group. Together, these five companies represent less than 20% of the fund's total portfolio.


Financials and technology represent the largest individual sector slices of the fund, totaling 32% and 22%, respectively.


Although economic and political headwinds persist, emerging markets appear to be making a comeback as we head further into 2011. ETFs allow investors to gain exposure to attractive regions without having to compromise their risk tolerance.


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