Turkey and Its ETF May Need More Time In The Oven

Are you brave enough to grow your nest eggs with a Turkey exchange traded fund (ETF)? If you want to invest some of your time and money into the Turkish stock market, it is best to do so with an appetite for risk, as this country may need more time in the oven.

Vito  J. Racanelli for Barron's suggests that after a 25% drop from October highs, the Turkish stock market is the cheapest it's been in a while. After outstanding performances since 2002, this emerging market has been one of the worst performers this year.

Investors have been deterred by two things in particular: a worsening economic picture and rising interest rates. Gross domestic product (GDP) was once high at 7%, but is predicted this year to slow to between 4% and 5%.

The current government is market friendly and fiscally disciplined, but the survival of the president's party is in question. The Constitutional Court could sweep it off its legs and leave the economy and the country's political stability in doubt.

There are two ways to get exposure in Turkey:

• Turkish Investment Fund (TKF): A closed-end fund, which is down 14.8% year-to-date.

• iShares MSCI Turkey Investable Market Index (TUR): A fund that launched on April 1, it's up 9.3% since then.

Turkey's ETF Heavy In Its Untested Financial System

The brand-new exchange traded fund (ETF) iShares MSCI Turkey Fund (TUR) has a heavy weighting in its relatively unproven financial sector.

Gary Gordon for ETF Expert mentions a recent report done by the International Monetary Fund and the World Bank about the stability of the country's financial system.

On the plus side, Turkey has a private banking sector that has seen a lot of activity with active lending to consumers and businesses. Direct foreign investment into the country has boosted the financial sector tremendously. Regulation is showing signs of sophistication.

But strikes against the system are that investors' confidence may still be fragile, banks have a large interest rate risk, Turkey's dependence on capital inflows and the fact that its new, stronger financial system is untested in a crisis.

The fund has a 53.5% weighting in financials, far and away the largest sector representation in the fund. Other sectors are materials (9.2%), telecommunication services (8.3%) and industrials (7.6%).

Turkey's prospects of joining the European Union are strong and it's one of the few Muslim-oriented countries that embraces capitalism. If this fund is too heavily skewed toward financials for your taste, there are other emerging market funds available that can help spread out the exposure a bit more.

iShares Breaks New Ground With Israel, Turkey and Thailand ETFs

Barclays Global Investors is breaking new ground with their iShares exchange traded funds (ETFs): they're the first to launch funds covering Israel, Thailand and Turkey.

In addition to these funds, iShares has also launched two global funds. One covers the world, another covers the world, minus the United States. The addition of these five funds means iShares has the largest international ETF offering, with more than 60 global, international and emerging market funds.

According to Noel Archard, head of U.S. iShares product development, non-U.S. markets account for 57% of the world's equity market capitalization and performance of these markets continues to differ from the U.S. markets.

The new ETFs are:

• iShares MSCI ACWI Index Fund (ACWI)
• iShares MSCI ACWI ex US Fund (ACWX)
• iShares MSCI Isreal Capped Investable Market Index Fund (EIS)
• iShares MSCI Turkey Investable Market Fund (TUR)
• iShares MSCI Thailand Investable Market Index Fund (THD)

The biggest asset attractor, reports Murray Coleman for Index Universe, will likely be ACWI. It has 2,884 stocks from both developed and emerging markets in every investible market in the world.

Turkey: The country is poised on the brink of seeing its newfound political and economic stability crumble, reports Yigal Schleifer for Eurasia Net. The Constitutional Court is expected to consider a motion to shut down the governing party. The country's currency, the lira, hit a seven-month low. Turkish law gives the judiciary broad powers to shut down political parties, and it has closed 24 of them since its establishment in 1963. The lawsuit is threatening the country's bid for European Union membership.

Israel: Despite the ongoing troubles in the Middle East, Israel's economy has moved at a 5% growth rate for the last four years, reports Paul David Glader for World Magazine. The currency, the shekel, has gained 31% against the dollar in the last two years, and unemployment is at its lowest level in the past decade. The country has also lowered its debt.

Thailand: Share prices closed higher today, but any optimism investors have there is overshadowed by U.S. economy fears, reports Thomson Financial. Thailand benefits from its country's general pro-investment policies and has strong export growth - 17% in 2006 and 12% in 2007. Last year, the economy grew 4.5%, according to the CIA World Factbook.

WisdomTree Could Launch Money Market ETFs

WisdomTree filed for 12 new money market exchange traded funds (ETFs) to cover 17 different foreign and emerging markets. The new funds are similar to the Rydex CurrencyShares funds with two major differences:  (1) They cover many new global markets, and (2) They are money market funds.

Murray Coleman for Index Universe on Seeking Alpha reports that the total number of currency funds available will be 17, representing currencies from almost every major market in the world. Several currencies will be accessible by investors for the first time, including the Brazilian real, Chinese yuan and the South African rand.

Another addition from WisdomTree includes the WisdomTree Developing Markets Fund which proposes to make short-term investments in money market instruments from 10 emerging markets: Brazil, Chile, China, Czech Republic, Hungary, India, Poland, South Korea, Taiwan, and Turkey. This fund is also being titled actively managed, with an average maturity of around 60-90 days.

This will allow investors to put their money in an investment outside the U.S. in a liquid and safe environment.

Read the disclosure, as Tom Lydon is a board member of Rydex Investments.

Eastern Europe ETF a Dark Horse in Emerging Markets Sector

When talk turns to the "emerging markets" exchange traded funds (ETFs), it often centers around a few economies in particular: Latin America, India and China. In the fourth quarter of 2007, however, there was one region that flourished: Eastern Europe.

Gary Gordon of ETF Expert says that the SPDR S&P Emerging Europe (GUR) ended the year just a few points off its 52-week high. Compare that with the performance of the iShares S&P Latin America 40 Index (ILF) and the iShares MSCI Pacific ex-Japan (EPP), both of which didn't perform as nicely as they had in the previous three quarters.

So far this year, GUR is showing strong demand, thanks in part to a heavy weighting in energy. The fund is 50% allocated in that sector, and of that, 60% allocated in Russia (one of the BRICs, you'll recall).

Is GUR truly an emerging market fund, though? The fund, overall, is 36.3% allocated in Russia, 13.1% in Poland, 12.1% in Turkey and 6.2% in Hungary. But before you nod your head "yes," consider that 27.1% of the fund is in the United Kingdom -- decidedly not an emerging market. One can't help but wonder if the fund is getting a little bit of its boost from the UK's comparatively strong economy.

Another way to access Eastern Europe is through the iShares MSCI Austria Index (EWO). The fund is heavily weighted in the struggling financial sector, though, so keep that in mind as you consider the credit crisis that is not only affecting things on U.S. soil, but also abroad.

A Closer Inspection of the New Emerging Markets Debt ETF (PCY)

The new exchange traded fund (ETF) PowerShares Emerging Markets Sovereign Debt ETF (PCY) that launched last week marks the first time that emerging markets' debt has been indexed for U.S. investors.

PCY tracks the Deutsche Bank Emerging Markets USD Liquid Balanced Index. The index focuses on "the most liquid" dollar-denominated emerging markets debt. A similarly narrow approach is used for the newly-launched SPDR Lehman International Treasury Bond ETF (BWX) and the iShares iBoxx $ High Yield Bond ETF (HYG), says James Picerno for the Capital Spectator.

As for PCY, one to three bonds are held for each country represented in the portfolio allocation. The index selects the bonds from each of the following countries when it rebalances: The countries in PCY currently include Columbia at 6.5%, Turkey at 6.4%, Brazil at 6.3%, Peru at 6.3%, Bulgaria at 6.3% and the Philippines at 6.3%. Remember though that the weightings are subject to change. PCY's expense ratio is 0.5%.

Turkey Needs an Economic Plan to Keep up Its CEF

Turkey's Turkish Investment Fund (TKF) closed-end fund (CEF) has been on a roll since August, but it might hit a wall unless it clearly defines its economic goals, as the economy shows signs of slowing.

Five years of strong economic growth averaging 7.4% per year was the primary reason the pro-business government of Recep Tayyip Erdogan received an overwhelming mandate for re-election. However, it's been more than two months since then and Erdogan has yet to reveal an economic agenda for the second term, reports Vincent Boland for the Financial Times. Expectations about Erdogan’s agenda are high because of the success of the past five years. Exports are booming, and foreign direct investment has flooded in – it could reach $25 billion this year. The increase in foreign investment could be one factor in TKF's upswing.

Highlighting the need for an economic agenda, the International Monetary Fund (IMF) has started talks with the Turkish government because of the country's large, current account deficit equal to roughly 8% of its gross domestic product (GDP). In addition, Turkish companies have huge foreign currency borrowings, which concerns the IMF.

Also putting the economy at risk is the strong lira that has risen sharply because of high Turkish interest rates and because it's significantly exposed to the carry trade, says Carl Delfeld for ETF XRAY. The carry trade refers to an investment strategy where investors borrow money in low interest rate currencies, such as the yen, and invest it in high-yielding currencies such as the lira, which offers real returns of about 10%.

Slow Economic Growth Could Pull Down Turkey's CEF

Although Turkey's Turkish Investment Fund (TKF) closed-end fund (CEF) is above its long-term trend line (200-day moving average) and is up 14.1% year-to-date, its economy could be in for troubling times. Turkey's economic growth fell to its slowest pace in five years during the second quarter of 2007. The lack of growth could open the door for Turkey's Central Bank to cut interest rates later this year, according to The New Anatolian.

TKF invests mostly in Turkish corporations that cover everything from commercial banks to food products to real estate sectors. If economic growth declines and stagnates, no doubt it will impact many of the corporations' earnings.

Turkish Elections Push Market to Highs; Where's the ETF?

While we wait for Barclays to introduce a Turkey exchange traded fund (ETF), we mentioned last Thursday that the Turkish Investment Fund (TKF) increased, partly because of the elections.

Well, the elections were yesterday and the Turkish stock market rose to record levels as the Justices and Development Party (AKP) lead by Recep Tayyip Erdogan won about 46.4% of the popular vote. The AKP party now has 340 seats in the 550-seat parliament, according to Carl Delfeld of ETF XRAY. The AKP party is seen as pro-business and pro-privatization. The chart below shows TKF's climb in accordance with the historic event.

Gobble, Gobble: Is It Turkey ETF Time?

Rumor has it that Barclays will launch an iShares Turkey exchange traded fund (ETF) soon. While we wait with bated breath for the new Turkey ETF to arrive, we can still track its closed-end fund (CEF), the Turkish Investment Fund (TKF). The chart below shows a recent increase that brought TKF up to 23.1% year-to-date. The increase could be because Turkey's general election is July 22, and it could have a large impact on the country's image in the investment world, says Carl Delfeld of ETF XRAY.

Recently, Turkey has been attracting lots of foreign investment, which also could be a factor in TKF's upswing. Its economy is steadily improving as well. Inflation was up to 69% as recent as 2001, and now it is down below 10% with an average GDP growth of 8% over the past three years. Auto exports from Turkey to Europe are increasing as both Toyota and Ford have expanded plants. It will be interesting to see how the upcoming ETF affects the CEF.

Turkey (TKF) Having Trouble Getting Off the Ground

Turkey continues to have challenges getting acceptance into the European Union. The EU feels Turkey has met its economic obligations but, as the International Herald Tribune reports, "Turkey also has to show it can apply EU law, meet the political conditions and take on all the EU rules and regulations."

In the meantime, the closed-end Turkish Investment Fund Inc. (TKF) remains almost 50% off the high it reached in March and, most recently, dipped below its 200-day moving average.