Indonesia ETF Gains Attention as Nation Grows

Van Eck Global's Market Vectors unit has set itself apart by targeting underrepresented niches in the exchange traded fund market. It hit a homerun with its Indonesia Index Fund (IDX Quote), introduced Jan. 20.

Most investors didn't realize this fund existed until a few weeks ago, when word got around that Indonesia has been one of the best-performing markets in 2009. The fund has rallied 69% since its inception, tripling the 22% gain of the Morgan Stanley Capital International EAFE Index.

Some analysts don't think the run is over. JPMorgan Chase(JPM Quote) upgraded the country on May 18, advising clients to expand their holdings. The Asian country's 4.4% gross domestic product growth in the first quarter lifted expectations. The resource-endowed country has benefited from more stable commodity prices.

The country, along with other Southeast Asian nations, learned a valuable lesson from the region's financial crisis in the mid-1990s. Unlike developed nations that binged on debt, Indonesia has worked to reduce its government debt to GDP ratio. In 1999, government debt exploded to 100% of GDP from 25%. Since then, debt has declined to about 30% of GDP.

Presidential elections on July 8 should reinforce the nation's development plans. President Susilo BambangYudhoyono's Democrat Party won nearly 21% of the vote in parliamentary elections held in March, 50% higher than the next two parties.

Indonesia's situation isn't all rosy. On Transparency International's 2007 Corruption Perceptions Index, Indonesia ranked 143 out of 179 countries, tying with Russia.

Recently, the Jakarta Post, the largest English-language newspaper in Indonesia, questioned whether economic reforms were more rhetoric than reality. Economic development has trumped governance issues in many emerging markets, but they will come to the forefront during this global recession.

Most emerging-market ETFs have very small allocations to Indonesia or no exposure at all. The country is among the top 20 economies in the world measured by GDP. It's the world's second-largest coal exporter, and many of its resource exports go to China.

Investors looking to invest in the Market Vectors Indonesia ETF should be aware that volume is still a paltry 15,000 shares a day, and assets under management were just $3.5 million as of April 30. Traders won't find those numbers attractive, but the fund is a nice addition for small investors with long time horizons who are looking for diversification.