Indonesia ETFs in Focus on Third Rate Cut

Indonesia's central bank yet again lowered its interest rate for the third straight month this year.
The bank slashed its key interest rate by 25 bps to 6.75%, in line with market expectations and with previous cuts in January and February. Additionally, it cut lending and deposit rates by 25 bps each to 7.25% and 4.75%, respectively (read: Indonesia Slashes Rates Again: ETFs in Focus).

Behind the Rate Cut

This series of cuts came in the wake of sluggish growth in Southeast Asia's largest economy last year. The Indonesian economy dipped below 5% for the first time since the global financial crisis, hurt by lower commodity prices. The monthly Indonesian Consumer Confidence Index has also fallen by 2.6 points to 110 in February.

However, inflation at this point is not a matter of concern as it rebounded from a six-year low hit in December. Notably, the annual inflation rate rose slightly to 4.42% in February, which is within the 3–5% target for 2016.

Another major reason for the rate cut is the recent appreciation of the Indonesian currency, the rupiah. Rupiah has been the best performing currency of the emerging markets, rising more than 5% against the greenback so far this year. The strengthening of the currency is weighing on exports, making the country’s products less competitive. Notably, exports fell 7.18% year on year in February (read: Top and Flop Currency ETFs YTD).
 
The move from the central bank came just hours after the U.S. Federal Reserve kept its benchmark interest rates unchanged and lowered the outlook for future rate hikes. The combination of the Indonesia rate cut and the Fed move triggered a rally in Indonesian stocks and this trend is likely to continue in the coming months. Further, the president Joko Widodo, popularly known as "Jokowi," is expected to reboot growth this year through a number of reforms (read: ETFs to Watch Post Fed Meeting).

Given the rounds of easing policy and hopes of economic revival under Jokowi’s presidency, funds targeting the country could be lucrative choices for investors seeking solid capital appreciation opportunities. Below, we have highlighted three Indonesian ETFs that will continue to benefit from the latest rate cut. All the three products have a favorable ETF Rank of 3 or ‘Hold’ rating, suggesting room for upside in the coming months.

iShares MSCI Indonesia Investable Market Index Fund (EIDO)

This is the most popular ETF tracking the Indonesian market with AUM of $503.8 million and average daily volume of more than 741,000 shares. The fund tracks the MSCI Indonesia Investable Market Index, holding 86 securities in its basket while charging 64 bps in annual fees from investors. The product is somewhat concentrated in both sectors and securities. Individually, the top two firms account for over 11% of the total assets while, from a sector look, financials dominates the fund’s return with more than one-third share. The fund has a certain tilt toward large-cap stocks at 84% and gained 16.4% in the year-to-date timeframe (read: 5 Market-Beating International ETFs YTD).
 
Market Vectors Indonesia ETF (IDX)

This ETF follows the Market Vectors Indonesia Index, holding a basket of about 46 companies that are based on or do most of their business in this Southeast Asian nation. The product puts about 54.7% of total assets in the top 10 holdings, suggesting moderate concentration. Large caps are pretty prevalent, as these make up 84% of assets, leaving little for small and mid-cap stocks. With respect to sector holdings, financials again takes the largest share at 34%, followed by consumer staples (19.1%) and consumer discretionary (15.1%).

The product has amassed $115.7 million in its asset base while it trades in moderate volume of around 74,000 shares. It charges 58 bps in fees per year from investors and is up 16.7% so far this year.

Market Vectors Indonesia Small-Cap ETF (IDXJ)

Unlike the other two, this is a small-cap centric fund. It is unpopular and illiquid having AUM of $5.8 million and average daily volume of about 2,000 shares. The fund tracks the Market Vectors Indonesia Small Cap Index and charges 61 bps in annual fees (see: all the Emerging Asia Pacific ETFs here).

Holding 28 stocks, the product is slightly skewed toward the top firm at 9.8% while other securities hold less than 7.5% share. Further, it is a bit concentrated from a sector look as financials takes the top spot at 40.4% while industrials and energy round off the next two spots at 23.6% and 15%, respectively. IDXJ added 8.7% in the year so far.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
ISHARS-MS INDON (EIDO): ETF Research Reports
 
MKT VEC-INDONES (IDX): ETF Research Reports
 
MKT VEC-INDO SC (IDXJ): ETF Research Reports
 
To read this article on Zacks.com click here.
 
Zacks Investment Research
 
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report