What's Behind The Indonesia ETF Slide?

Indonesian ETFs, which have had a smooth year so far, are losing their grip of late. iShares MSCI Indonesia ETF EIDO and VanEck Vectors Indonesia Index ETF (AX:IDX) have lost 6.3% and 6.5%, respectively, in the last 10 days as of November 18, 2016.

Meanwhile, Indonesia's central bank kept its benchmark interest rate unchanged last week. The central bank adopted this cautious stance to deal with the volatility in financial markets post Donald Trump’s win. With U.S. president-elect Trump planning expansive government spending, lesser financial regulation and increased tax cuts to boost economic growth, the U.S. dollar has been gaining strength. As a result, Indonesian currency fell almost 3.5% against dollar last week, requiring intervention from the Indonesian central bank to stabilize the currency (read: Currency ETF Winners & Losers Post Trump Win).

Meanwhile the country’s economy is also in a tight spot. Indonesia’s reforms and growth plans received a setback with the country’s GDP growing at a slower-than-expected pace. The government is currently forecasting growth of about 5% for this year, which is much below the target level of 7%.

The Indonesian economy has been grappling with plummeting prices of commodities like palm oil and coal. The outlook for the country improved after the Indonesian president, Joko Widodo, popularly known as "Jokowi" took office in October 2014. He introduced a host of economic reforms and increased spending on infrastructure. In fact, he has been quite vocal about his wishes to see interest rates fall further to spur growth. Jokowi targets to get the annual growth rate up to 7% in 2019, i.e. by the end of his term. The central bank has cut the key benchmark rate six times this year, by a total of 150 basis points (bps) to boost growth in a muted inflation environment (read: Should You Buy Indonesia ETFs on Policy Easing Spree?).

However, overall investor sentiment toward Indonesia is still positive, courtesy of its liberalization drive which eased restrictions on foreign investment in several industries including films, restaurants and health care. Jokowi’s move to deregulate the traditionally protectionist economy should help in accelerating growth and making the Indonesian business environment more conducive to new investments.

A Closer Look at Indonesia ETFs

Both EIDO and IDX have a Zacks ETF Rank of 3 or ‘Hold’ rating with a High risk outlook (see: all Asia-Pacific Emerging ETFs here).

EIDO

This is the most popular ETF tracking the Indonesian market with AUM of $508.4 million and average daily volume of more than 1000,000 shares. The fund tracks the MSCI Indonesia Investable Market Index, holding 83 securities in its basket while charging 62 bps in annual fees from investors.

The product is somewhat concentrated in both sectors and securities. The top five firms account for more than 40% of total assets, while, from a sector point of view, financials dominates the fund’s assets with 36.7% share (read: Indonesia ETFs in Focus on Third Rate Cut).

IDX

This ETF follows the MVIS Indonesia Index, holding a basket of about 42 companies that are based or do most of their business in Indonesia. The product puts about 55.4% of total assets in the top 10 holdings, suggesting moderate concentration. With respect to sector holdings, financials again takes the largest share at 26.8%, followed by consumer staples (18.2%) and consumer discretionary (14.4%).

The product has amassed $93.9 million in its asset base while it trades in volumes of around 56,000 shares. It charges 58 bps in fees per year from investors.

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ISHARS-MS INDON (EIDO): ETF Research Reports

VANECK-INDONES (IDX): ETF Research Reports

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Zacks Investment Research