iShares MSCI Turkey (NYSEARCA: TUR) is an exchange-traded fund (ETF) that was created in 2008 to let investors obtain exposure to Turkish companies and benefit from the economic growth in Turkey. The fund tracks the results of the MSCI Turkey Investable Market Index, which is designed to mirror the performance of the equity market in Turkey. Since its inception, the fund has generated an average annual rate of return of 0.75%.
Turkey is one of the largest emerging market economies in the world by nominal gross domestic product (GDP) and is a prominent exporter of textiles, transportation equipment, construction material and electronics. Turkey expanded substantially from 2002 to 2013 by showing an average annual GDP growth of 4.9%, which is one of the highest among emerging economies. Exactly for this reason, TUR was started to take advantage of Turkish economic growth, which tends to be higher when compared to developed countries.
Due to Turkey being an emerging country, investors are exposed to numerous country-specific and currency risks. Turkish stocks are traded in Turkish lira, whose foreign exchange to the U.S. dollar tends to be volatile and witnessed a significant average annual depreciation rate of 13% from 2010 to 2015, depressing potential returns from investing in TUR. Also, Turkey demonstrated volatile competitiveness of its exports, making its economic growth dependent on domestic demand and foreign finance.
TUR invests in Turkish equities that are part of the MSCI Turkey Investable Market Index. Historically, the fund's holdings were highly concentrated on the financial sector with about 44% allocation. Industrial companies account for 15% of TUR's invested assets, while consumer staples have 12% allocation. TUR's portfolio gives bigger weight to the medium market cap companies with 55% allocation, while large market cap companies account for 31% of the invested assets.
The fund's top five equity holdings account for 37% and include prominent financial, energy, telecommunication and consumer staples names. Top 10 holdings of TUR have 59% allocation, and no single company holdings account for more than 11%.
Characteristics
TUR was created on March 26, 2008 and is managed by BlackRock Fund Advisors. The fund is following a passive investment approach by using a representative sampling indexing strategy that allows it to achieve similar investment results as those for the underlying index. The fund has an annual expense ratio of 0.62%, which is in line with ETFs that invest in emerging countries with similar investment strategies. The fund's shares are traded on the New York Stock Exchange and can be bought on numerous brokers' platforms.
Suitability and Recommendations
Investing in TUR comes with significant country-specific risks. Even though Turkey boasts one of the highest growth rates among emerging economies, the country suffers from burdensome government regulation. In particular, the regulatory framework imposes costly obligations by limiting the ability of growing companies to fire workers. Also, due to weak institutions in Turkey, certain companies obtain more favorable treatment than others, resulting in uneven compliance with laws and weakened trust. Investors should pay attention to the corporate laws and their enforcement in Turkey before committing money to TUR.
Despite efforts by the Turkish government, the inflation rate and debt levels within the country rose significantly between 2010 and 2015, increasing financial risks for financial institutions held by TUR. Currency depreciation remains the largest risk investors have to cope with going forward. Also, the fiscal position of the Turkish government improved substantially since 2005, resulting in increased international credibility of the country and improving the investment climate.
According to modern portfolio theory, investing in Turkey follows a growth investment strategy, as the country offers higher real economic growth when compared to developed countries. Due to substantial foreign capital outflows and currency depreciation, TUR faced significant volatility between 2010 and 2015. The fund's five-year standard deviation was 28.9% and its five-year average annual return was -5%, resulting in a negative five-year Sharpe ratio of -0.04, which is substantially below the Sharpe ratio of 1.34 for the S&P 500 Index.
TUR is most appropriate for investors interested in gaining exposure to the broad equity market in Turkey and taking advantage of the higher economic growth rates exhibited by the Turkish economy, albeit at substantial currency risk.
