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By Maureen Nevin Duffy

Van Eck’s latest emerging-markets exchange-traded fund is strategically timed but not without risk, analysts say.

Based on the Market Vectors Indonesia Small-Cap index, the new Van Eck fund intends to profit from the largely consumer-driven economy in Indonesia, where domestic consumption accounts for 60 percent of the country’s GDP, Van Eck’s marketing director, Edward Kuczma, said in announcing the fund’s launch late last month.

Kuczma likes Indonesia’s “organic internal growth” versus other countries’ dependence on exports, and that, like many emerging markets countries, it was not affected by the 2008 credit crisis or other developed economy upheavals. As such, markets like Indonesia, India and Brazil, in which Van Eck has also based ETFs, are said to be uncorrelated; that is, they are not likely to be felled by the same market killers as the U.S. and Europe, which tend to sneeze when one or the other catches a cold.

Van Eck’s Indonesian ETF is its second for the country. The fund company first introduced a broad-based large-cap fund for Indonesia in January 2009, which now has $532 million in assets under management. It was followed by the iShares MSCI Indonesia Investable Market Index Fund ETF in May 2010, which currently has $572 million in assets.

The new Van Eck fund also follows other Market Vectors’ small-stock funds in emerging markets. First came its Brazil small-cap ETF in May 2009, followed by its India small-cap ETF in August of the next year.

“They all revolve around global recovery issues,” says Scott Freeze, president of Street One Financial, a research and execution firm based in Huntington Valley, Pennsylvania. But Freeze notes that their performance rests on the assumption that the price of oil does not continue to skyrocket and hinder global recovery. “If it doesn’t,” Freeze says, “small-cap emerging-markets funds will do very well for investors.”

Another potential risk is political, as emerging-markets governments are limiting their largess. In Indonesia, the government has maintained a fuel subsidy of $120 a barrel that it wants to end as soon as possible. That loss could inflict damage on the vulnerable budgets of small companies. Kuczma noted that it has already caused protests from taxi drivers and boat owners.

Still, Freeze doesn’t expect a big effect on smaller companies. “It will definitely impact the economy on a grand scale,” he tells Institutional Investor. But he says there will be more impact on large companies than on small ones. Since larger companies put down roots in Indonesia back in the 1990s, their corporate structures are less flexible and more entwined with government programs, says Freeze. “Large companies are locked into government moves,” he says.

Morningstar analyst Patricia Oey sees another risk in the new Market Vectors offering. Oey wrote in a recent report that while the country’s “growing middle class” and “abundant natural resources” were attractions, the fund’s strategy of not hedging its currency exposure means an up and down ride for investors. “Fluctuations between the U.S. dollar and the Indonesian rupiah also contribute to volatility,” she cautioned.