Look to Malaysia For EM ETF Exposure

It is no secret that scores of emerging markets ETFs, diversified and single-country funds, have been residing in the proverbial tank over the past several months.

Emerging Asia, a region viewed by many some analysts and economists as more attractive and stronger than Latin America, has not been immune to the sell-off.

Actually, one ETF tracking a Southeast Asian nation has proven quite sturdy. Over the past 90 days, the iShares MSCI Malaysia ETF EWM is higher by 1.6 percent. That represents a stunning reversal of fortune because just four months ago, the FTSE Bursa Malaysia KLCI Index was the worst-performing major bourse in the region.

As other ETFs tracking Southeast Asian nations, such as the Market Vectors Indonesia ETF IDX and the iShares MSCI Thailand ETF THD, soared in the early part of 2013, EWM was a laggard due to political headwinds. In early May, EWM hit a new all-time high on news of Prime Minister Najib Razak's victory. Razak's National Front coalition captured 127 of Malaysia's 222 parliamentary seats. The party has ruled Malaysia for close to six decades.

Still, it is not unfair to say many investors would be unimpressed with a 90-day gain of less than two percent. Then again, any comparison of EWM needs to be apples-to-apples. Over that time, IDX and THD are down 15.3 percent and 13.4 percent, respectively. The iShares MSCI Philippines ETF EPHE is lower by 13.3 percent while the Market Vectors Vietnam ETF VNM is down 8.6 percent.

EWM, one of a small number of emerging markets ETFs than can legitimately be considered low beta, has even outpaced the iShares MSCI Singapore ETF EWS. EWS itself is a low beta fund that tracks an AAA-rated developed market.

EWM has a three-year standard deviation of 14.89 percent compared to almost 21.1 percent for the iShares MSCI Emerging Markets Index Fund EEM, according to iShares data.

EWM could offer more upside. The KLCI Index "gauge will probably rise 15 percent in the next 12 months and maintain the lowest volatility among the world's biggest markets as Najib boosts spending to reach developed-nation per-capita income levels by 2020 and the nation's $165 billion pension fund buys stocks," reports Asean Investor, citing Samsung Asset Management.

Investors are putting cash to work with Malaysian equities and although EWM has seen year-to-date outflows of $26.6 million, the ETF has recovered about $6.6 million since the May elections. Either way, those numbers are far superior to the nearly $14 billion pulled from BRIC equities this year, according to Bloomberg.

One potential risk to the Malaysia thesis in the near-term is valuation. The KLCI trades at 16 times earnings compared to 9.6 times for the MSCI Emerging Markets Index, according to ASEAN Investor. EWM has a P/E of 18.7, slightly above EEM's, though well below EPHE's.

Then again, emerging markets valuations do not always pan out on the upside or downside. If investors had been making valuation bets, chances are EWM's rival Chinese and South Korean ETFs would be trading higher today than where they reside.

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