FRN Invesco Frontier Markets ETF

The long overlooked Central Asia & Mongolia zone has recently caught investor's attention. This commodity-centric region is getting all the attention thanks to an upsurge in natural resource prices.
 
All the countries in this region are rich in deposits of various resources including petroleum, natural gas and mining commodities like Gold, Copper, Silver and Coal. Mongolia is one of the largest coal-producing countries, Kazakhstan is one of the major oil producing countries and Uzbekistan has the largest open-pit gold mine in the world (read: 3 Forgotten Ways to Play Mining Sector with ETFs).
 
When the taper talks began in May, market movement started to turn around, infusing fresh blood into commodity-oriented ETFs. The improving China data also helped in lifting these products as the country is a major user of the said minerals and one of the biggest importers of those commodities.
 
As per Global X, trade between the commodity depot Central Asia and China grew approximately $500 million in 1992 to $30 billion in 2010 indicating the dependence of this zone on China’s recovery.
 
Following diplomatic developments in Syria, Gold may not be a good choice to bet on, but commodities like Coal are still offering good entry points. Moody’s neutral to positive comment on Coal saying it “does not expect industry fundamentals to deteriorate further over the next 12 to 18 months, though business conditions remain very weak” sent coal stocks rallying.
 
The rating agency also raised its coal industry outlook to stable from negative (see Are Coal ETFs Back on Track?). In such a scenario, one could ride on the commodity strength in Central Asia & Mongolia.
 
ETF Impact
 
There is a new fund called Global X Central Asia & Mongolia Index ETF (AZIA) which serves up exposure as a pure play in this forgotten region. The performance of AZIA mirrors that of natural resources and their outlook.
 
With coal stocks heaving a sigh of relief on the expectation of better pricing by next year, Mongolian exposure, albeit little, might drive the fund higher. Kazakhstan's abundance of coal should also be kept in mind.
 
Central Asia & Mongolia is a bit tricky part of the world to invest in since very few and not all five counties of central Asia (Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan) get exposure in the emerging markets or frontier market funds. This criterion brings AZIA in focus. In the last three months, the fund gained 8.5% as of September 30, 2013.
 
AZIA in Details
 
Debuted in April 2013, Global X Central Asia & Mongolia Index ETF (AZIA) tracks the performance of the Central Asia & Mongolia Index. The fund doles out exposure to 22 securities from the various nations that have exposure to the central Asia and Mongolia region.
 
So far, the fund has been ignored in the emerging markets segment with just about $1.5 million in AUM. This leaves the fund with paltry trading volumes. Its daily trading volume of around 3,000 is also quite light compared to better known emerging market ETFs like VWO or EEM.

The product puts as much as 74.0% of its total assets in the top 10 holdings, suggesting a very high concentration risk. Centerra Gold Inc. (12.04%), KAZAKHMYS (9.58%) and Bank of Georgia (9.47%) hold the top three positions in the basket (see all the Asia Pacific Emerging Market ETFs).

In terms of geographic exposure, the United Kingdom (41%), Canada (19%), and Kazakhstan (13%) round out the top three as well as take up the lion’s share of the fund's assets. Greater exposure to the better-positioned United Kingdom in Europe also explains why it can be a prudent bet in sluggish global recovery.
 
Further, almost exclusive focus on blend style also calls for lower volatility in the fund. The choice is moderately expensive in the space, as it charges 69 basis points a year in fees which is a bit higher than the average expense ratio in the emerging market space, though definitely lower than some of the high cost picks out there.
 
Bottom Line
 
If mining rally holds up, in our opinion, investors can try investing in AZIA since the fund is new and offers lucrative valuation at the current level. Although the recent jobless claim data in the U.S. and the unanticipated “Zero Taper” will likely reverse investor attention again towards the stock market, the Fed’s cut in GDP outlook implies that the picture is not as rosy as perceived by the most (read 3 ETF Winners from the ‘No Taper’ Shocker).

This sentiment may provide a boost to commodity outlook though, making natural resource picks interesting ones for the time being. Also, we expect AZIA to remain stable as long as China keeps staging a nice show, so this forgotten ETF might be worth a closer look by some investors who have a high risk tolerance.
 
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GLBL-X CTL A&M (AZIA): ETF Research Reports
 
ISHARS-EMG MKT (EEM): ETF Research Reports
 
ISHRS-MSCI F100 (FM): ETF Research Reports
 
GUGG-FRONTR MKT (FRN): ETF Research Reports
 
VANGD-FTSE EM (VWO): ETF Research Reports
 
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