Indonesia Becomes Emerging Markets Hotspot

(Editor's note: TheStreet today named 111 mutual funds and exchange traded funds, or ETFs, winners and runners-up in its first annual awards ceremony. A list of the funds and related articles can be found on the awards page.)

NEW YORK ( TheStreet) -- Van Eck's Market Vectors Indonesia ETF ( IDX) debuted a little more than two years ago and, after briefly lagging the standard-bearer Vanguard Emerging Market ETF ( VWO) as global stock markets sank, the Indonesia fund has been a homerun for investors. It has surged 270%, twice that of the Vanguard fund.

The Indonesia exchange traded fund, I noted when it was first released, should be more volatile than emerging market ETFs that hold a wider array of securities. Narrower segments, such as countries and industries, rise and fall more steeply. For example, oil-sands stocks are more volatile than Exxon Mobil ( XOM) and the Energy Sector SPDR ( XLE). And, likewise, an Indonesia ETF will rise and fall at a faster pace than a fund made up of several countries' stocks.

This is good on the way up and bad on the way down. As global markets have rallied in the past two years, it stands to reason that the Indonesia ETF would outperform benchmarks. During the next global market sell-off, Indonesian stocks will likely drop more than broader indices. As opposed to being good or bad, this is more of an attribute that needs to be understood and managed.

More recently, Market Vectors Indonesia jumped 42% last year and is up 4.4% this year. Last year's returns and a favorable risk-reward profile earned New York-based Van Eck's exchange traded fund TheStreet's 2011 Best Fund award in the emerging market ETF category. The runner-up was the PowerShares Emerging Markets Infrastructure ETF ( PXR).

The makeup of the fund hasn't changed dramatically since 2009. At that time, Market Vectors Indonesia had 34% in financial stocks versus 29% now. It had 16% in energy, 12% in telecommunications and 11% in materials, and now has 11%, 11% and 12%, respectively.

The fund offers a great lesson on the unpredictability of dividends from exchange traded funds. The trailing yield of the index underlying the fund was 7% two years ago, and no one should expect that sort of payout. Indeed, the dividends from the fund have been surprisingly small. The first dividend in 2009 was 6 cents and, a year later, it was 27 cents, making the yield from the last dividend about 1%. In other words, the yield won't shelter investors from a bear-market storm.

The investment case, as well as risks and rewards for Indonesia, haven't been altered dramatically. Like many emerging economies, Indonesia is resource-rich, a benefit since global demand for commodities is increasing. That raises the prosperity of the country's residents, creating a middle class that leads a better life of improved diets and modern infrastructure. The risks include accelerating inflation and political instability.

Some portion of the massive rally in global markets over the past two years is attributable to the extraordinary monetary measures taken by the U.S. Federal Reserve. After such a fantastic run for the Market Vectors Indonesia ETF, it makes sense to be cautious and look for a downturn when and if the Fed changes its easy-money policy. Until then, I would expect the Indonesia ETF to keep surging ahead.

TheStreet awarded "Best Mutual Funds and ETFs 2011" to 111 funds, half of which were winners in their investment category and half runners-up. The criteria are as follows: Mutual funds must have had a three-year history as of Dec. 31 and been open to new client investments, with the minimum not exceeding $100,000. Closed-end funds and ETFs must have had a one-year track record. The rating is based equally on performance and risk. Emphasis is given to longer-term performance, based on total returns minus expenses. Risk measures include standard deviation, size of peak-to-trough (drawdown factor) and duration.

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Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback; click here to send him an email.

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