New Turkey ETF: A Bit Heavy On Financials

The International Monetary Fund and the World Bank recently published information about the stability of the financial system in Turkey. For the most part, the review was quite favorable.

More specifically, Turkey has a vibrant private banking sector that has been actively lending to consumers and to businesses. Direct foreign investment into Turkey has also helped the financial sector enormously. What's more, regulation of the financial system is showing signs of greater sophistication, though there is no evidence yet to demonstrate whether intervention/enforcement would be swift or vigorous.

Simply put, Turkey's financial system, as well as its oversight, is relatively new. We can't really know how well its "Fed equivalent" would react in a crisis of confidence.

And therein lies a major concern with emerging market investing. If one of the most "vetted" systems in the world, the U.S Federal Reserve, is getting an overhaul and extension of powers as I type, what are we to make of Turkey's developing institution?

This might not be that big a deal, were it not for the most recent exchange-traded fund to hit, the iShares MSCI Turkey Fund (TUR). The new ETF has a 53% weighting in financial stocks.

Let's look at this from another direction. We can invest in the top 100 highest-paying dividend companies in the U.S. through the iShares Dow Jones Dividend Index Fund (DVY). 40% of those companies are financial corporations.

DVY suffered miserably in the U.S. credit crisis, falling 24% from top-to-bottom. Most of that damage is due entirely to the very high weighting in financials.

TUR has a similar weighting to the same sector. Would Turkey be able to respond as well as the U.S. Federal Reserve if a crisis spread to Turkish borders? In fact, many believe that our Fed responded too late to the lack of liquidity. (Better late... than never!)

The point here is... for those that see emerging markets as the way to big time profits... would the risk-reward relationship of a 50% emerging market financials fund be worthy? Even under the best of circumstances, I might prefer a bit more diversification from a single-country fund.

Turkey has an excellent shot at joining the European Union. And it remains one of the few Muslim-oriented countries that embraces capitalism.

Nevertheless, If untapped markets is your thing, you might be wise to stick with more diversified holdings like the iShares Emerging Market Index (EEM) or the Vanguard Emerging Markets Fund (VWO). And then there's the closed-end Turkish Investment Fund (TKF), down 50% since January 2006. (But who's keeping track?)