S&P's Mongolia Downgrade Not Hitting Central Asia ETF...Yet

On Tuesday, Standard & Poor's Ratings Services said that it lowered its ratings outlook on Mongolia to Negative from Stable while affirming the central Asian country's BB- long-term and B- short-term sovereign credit ratings. Those are both junk ratings.

The one ETF that could be vulnerable to S&P's now dour view of Mongolia is the newly minted Global X Central Asia & Mongolia Index ETF (NYSE:AZIA), which debuted earlier this month. AZIA is the one ETF currently on the market with noteworthy exposure to commodities-rich Mongolia. The fund allocates 13.96 percent of its weight to the country, making Mongolia the ETF's third-largest country exposure behind Kazakhstan and Russia, according to Global X data.

AZIA has not traded yet on Wednesday, but the new ETF has gained two percent in the past week. The ETF is the first to give significant allocations to Kazakhstan (46.1 percent), Mongolia and Turkmenistan (5.9 percent). AZIA is also the only ETF with any decent exposure to Kyrgyzstan and Tajikistan.

In other words, AZIA's country profile is such that it is fair to say this ETF perhaps best suited for the adventurous investor. And it could be Mongolia that provides plenty of adventure.

"We revised the outlook on Mongolia to negative to reflect our opinion that higher policy risk has increased the chances of a downgrade to more than one-in-three for the country over the next six to 18 months ," said S&P, according to the UB Post. "Mongolia's fiscal and external profiles could deteriorate materially over the next year or two in the absence of a significant improvement in policymaking regarding government borrowing, public spending, and the business environment."

S&P also said it could downgrade Mongolia if the government there increases borrowing or the country's mining sector continues to slump. On the other hand, it could be the mining the sector that is the source of the bulk of future foreign direct investment into Mongolia in the future.

Mongolia's Tavan Tolgoi coal mine is one of the largest in the world and has a nearby, loyal customer in the form of China. In fact, when Tavan Tolgoi fell on financial hardship in 2011, it was Aluminum Corporation of China (NYSE:ACH) that came to the rescue.

Naysayers will coal is not the place to be for investors these days. A look at the chart of the Market Vectors Coal ETF(NYSE:KOL) indicates as much. However, Mongolia's Gobi desert is home to an abundance of other deposits such as copper, gold and silver. Australian mining giant Rio Tinto (NYSE:RIO) has invested there.

There is a rub with that scenario, too. Prices for all three of those metals have been under siege this month. So have the country-specific ETFs the offer exposure to major producers of those metals.

Obviously, AZIA is about much more than Mongolia, but with sliding metals prices and the potential for sovereign debt downgrade, the ETF will need Kazakhstan to carry the load if Mongolia struggles.

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