By David Sterman

As an investment concept, BRICs are SO yesterday. These days, investors are looking for opportunities at a host of growing, developing nations with favorable trends and demographics that offer the potential for substantial returns.

It wasn't long ago that many of these nations were places that most U.S. investors simply ignored. Countries such as Indonesia, South Africa and Argentina were stuck under the thumb of repressive governments; communist Vietnam appeared light years from being able to host a stock market; and countries like Turkey were so mismanaged that annual inflation occasionally reached more than 100%.

Today, those five nations have been grouped together under the handy moniker of VISTA, an amalgamation that represents a dynamic long-term investment opportunity.

This is the logical evolution of a post-BRIC world. Brazil, Russia, India and China deservedly attracted many emerging market investors in the past decade. Their economies grew rapidly, which led to the rise of sizable middle classes. Yet the BRICs are showing their age. Rising inflation have gripped Brazil and India, and both countries have infrastructure bottlenecks that threaten to crimp economic growth. China may be on the cusp of losing its competitive edge as its currency slowly strengthens, and Russia faces challenging age demographics with its shrinking population.

Todd Rosenbluth, a mutual fund analyst at S&P Capital IQ, has noted a big change in sentiment. "We've seen investors looking to deeper emerging markets, and the ETF providers are responding." Indeed, you can now find a targeted ETF for more than 50 countries. And we're not just talking about offerings from ETF titans such as Barclays and State Street. "The smaller ETF players such as Wisdom Tree and Global Van Eck have focused here to build a niche," Rosenbluth notes.

For investors looking for exposure to these markets, there are trade-offs between country-focused mutual funds and ETFs. Mutual fund managers spend a lot of time with local companies, and can adroitly rotate from sector to sector to reflect changing economic dynamics. Yet that domain expertise comes at a cost--actively-managed funds typically carry expenses in the 1% to 2% range (which can really add up if it's a long-term holding). And with closed-end funds, investors may be stuck with a fund price that is at a steep discount of the underlying net asset value of the portfolio's holdings.

In contrast, ETFs often carry lower expenses. But a number of them--especially the smaller ones--may lack sufficient assets to gain exposure to all of the key sectors within a country. Many funds and ETFs tend to focus on a particular country's largest firms, which generally are tied to exports to Europe and the U.S. It's fair to ask if these firms really reflect the dynamics of the local economy.

Index IQ, a relatively new player on the ETF scene, aims to target investments that are a better proxy for local economic activity. "We realized that investors who were focused on these regions were hoping to capture the gains from the local economies, but actually held funds that more closely mirrored the health of developed economies," says Index IQ's CEO Adam Patti.

His firm looks to acquire small- and mid-cap companies in those countries, typically in the 70th to 85th percentile in terms of market capitalization. For example, the IQ Emerging Markets Mid Cap ETF (Nasdaq: EMER) has its largest sector weightings in consumer discretionary, financial services and industrial stocks that have a greater exposure to local economic activity. South Africa, Indonesia and Turkey are among the fund's top 12 country weightings.

When seeking exposure to the dynamic growth expected out of the VISTA countries noted above, investors don't need to take the concept too literally. Exposure to the region that those countries operate in is most crucial, and can help avoid the risks associated with any given country. Take Van Eck Global's Market Vectors Africa Index ETF (NYSE: AFK).

"Africa is a continent that has huge potential, but many institutional investors tend to focus on just South Africa, which has well-established companies with long operating histories," says Van Eck portfolio manager David Semple. His firm chose to broaden the scope for the ETF, owning stocks that are contained in the Dow Jones Africa Titans 50 index. That index has about 25% of its exposure to South Africa, but Nigeria, Egypt and Morocco are also ably represented.

Yet even within regions, it's important to understand the key differences between countries. For example, over the past 12 months the Market Vectors Indonesia ETF (NYSE: IDX) has risen 40% while the Market Vectors Vietnam ETF (NYSE: VNM) has fallen by a commensurate amount. Why the disconnect for these two VISTA neighbors? "Both of these countries have large young populations and are low cost places for doing business, but Vietnam has a weaker education system and low levels of productivity," Semple says.

He calls Indonesia the "poster child of emerging markets," citing a stable political environment, low interest rates and middle class spending power that is growing at a fast pace. Yet should investors jump into this emerging market after its value has more than tripled since 2008? "You are paying up for exposure now, but this is a solid long-term story, and for long-term investors there will be a worthwhile pay off, Semple says.

Time to Invest?

Make no mistake, VISTA countries are best suited for long-term investors. Their stock markets are extremely volatile, posting neck-snapping gains and losses in very short periods. The good news: None of these markets looks especially expensive at the moment. Indonesia, at 12.5 times projected 2012 profits, stands as the only index among VISTA countries with a forward price-to-earnings (P/E) ratio above 10. Considering that these markets may be poised for faster long-term economic growth than more mature economies over the next few decades, share prices seem like a relative bargain considering the S&P 500 currently trades at about 13 times forward earnings. Here's a quick snapshot of each country.

Vietnam

This stock market has performed poorly over the last five years, in large part because its banking sector is saddled with many non-performing loans. And whereas Chinese communist officials have shown an adept touch when it comes to encouraging commercial development, Vietnamese bureaucrats are still feeling their way and implementing a range of policies that make it hard to conduct business. Rising inflation is another headwind for the country, which still lacks the infrastructure to handle the rising level of economic output.

Still, it's hard to understate the gains this country has made over the last decade. Per capita income has more than doubled, and foreign direct investment has been growing at least 20% a year throughout the period. Major multi-national firms such as Intel have built massive factories, and some people think a rising Chinese currency will help lead to a migration in factory output to lower-cost Vietnam in coming years.

Indonesia

The global market crash in 2008 caused investors to flee seemingly risky frontier markets. Those with the intestinal fortitude to wade in back around that time were amply rewarded, as Indonesia's three-year return of 216% can attest. That's a clear argument to be bold in the emerging markets space when others are fleeing.

Indonesian stocks are reasonably valued, even after such as strong run. And a population that is equal to France, Germany, the U.K. and Spain combined represents a potentially powerful emerging consumer class. Best of all, Indonesia's former reputation as a hot bed of corruption and nepotism is fast fading as its citizens demanded--and received--major economic reforms that ended the privileges granted to the country's elite.

South Africa

The financial press has been buzzing about Africa in 2011, predicting that the long-struggling continent is finally getting its act together. Africa is already blessed with abundant natural resources, yet it's the advent of more stable governments and rising consumer classes that are the key factor behind increased money flows.

If the continent can truly build a head of steam in the decade ahead, then South Africa will be a clear beneficiary. That country is home to a number of multi-national companies that have a deep presence in the business sector of many of its neighbors. Poverty is still a major concern, as the vast majority of its citizens earn a lot less than the average $10,500 per capita income. But post-apartheid investments in education and land distribution are aimed at closing the wealth gap.

Turkey

Turkey is possibly the most advantageously-situated country in the world, just steps away from Southern Europe, central Asia, Russia and the Middle East. As a result, the nation is boosting trade in virtually every direction. Turkey's industrial output has been rising at a double-digit pace over the last five years--few countries in the world can say that right now. As Turkey's trading partners get back on their feet, Turkey's low-cost but very efficient industrial sector could emerge as the backbone of the region, much as German factories export across Europe.

Yet some investors have expressed concern that Turkey may struggle in the short term. The rapidly expanding middle class has developed a taste for imported goods and the country is running an unsustainable trade deficit. Troubles in Syria, Turkey's largest trading partner, could also lead to a slowdown in growth in 2012. Yet longer-term, expanding democracy across the Middle East, and the possible economic benefits that may accrue from that trend, should allow the Turkish economy to power ever higher over the coming decade.

Argentina

Nobody's crying for Argentina now. A crippling economic crisis in the last decade is a fading memory and the country has become a regional export powerhouse, thanks to a relatively weaker currency and surging economic growth in neighboring countries such as Brazil, Chile and Colombia.

Unfortunately, Argentina's policy planners have a knack for snatching defeat from the jaws of victory, and a tenuous balance between the interests of urban Buenos Aires and the rural agriculture interests periodically lead to economy-sapping clashes. Still, this economy, which has been on a steady century-long decline after being the fourth-largest in the world in 1900, now appears poised for long-term economic gains thanks to its increasingly competitive economic position with trading partners.

A plethora of choices

There are a number of ways to use ETFs to gain exposure to these dynamic markets. For many investors, an ETF that simply tracks the results of the local stock market index are sufficient.
These include:
Vietnam         Market Vectors Vietnam ETF (NYSE: VNM)
Indonesia       Market Vectors Indonesia ETF (NYSE: IDX)
South Africa    iShares MSCI South Africa Index (NYSE: EZA)
Turkey            iShares MSCI Turkey Index (NYSE: TUR)
Argentina       Global X FTSE FTSE Argentina 20 ETF (Nasdaq: ARGT)

For some investors, a focus on sovereign debt is the better way to go because it removes the volatility that equity markets bring. The PowerShares Emerging Markets Sovereign Debt Fund (NYSE: PCY), for example, has returned an average of 12.5% over the last three years. Its top holdings include those from Vietnam and Indonesia. With rare exception, governments always honor these obligations. In a study conducted by Moody's, the credit-ratings agency found that the default rate on investment grade sovereign debt was just 0.667% after 10 years of issuance, versus the corporate investment-grade default rate of 2.008%.

The iShares JPMorgan USD Emerging Markets Bond fund (NYSE: EMB) is a favorite vehicle for many investors that seek exposure to this asset class, as it trades more than 300,000 shares a day. The average bond in the fund is rated BB-, which explains the relatively robust 7% average annual return (over the last three years). Roughly 40% of the fund's bond holdings were issued by the governments of Turkey, Russia, Brazil, Mexico and the Philippines, with the remainder coming form 30 other countries, so there's not much country-specific risk here.

A Bet Against the Dollar

After several decades of persistent trade deficits, a number of economists think the U.S. dollar may be headed for a steady downward move against other currencies. That would be a plus for U.S. exporters that could gain a pricing edge, but it would also boost the value of foreign investments. Every 1% drop in the dollar boosts the value of any foreign-denominated assets by a commensurate amount.

Although the country-focused ETFs noted earlier would surely rise in value if the dollar weakens, some investors like to make a direct wager by investing in currency funds. One example is the WisdomTree Dreyfus Emerging Currency ETF (NYSE: CEW). The fund owns a basket of roughly one dozen currencies used in various emerging markets, including Turkey and South Africa, two of the five VISTA nations.

Investors can even target specific countries. The WisdomTree Dreyfus South African Rand fund (NYSE: SZR) is a play on the South African currency strengthening against the U.S. dollar. South Africa has generated a $2.5 billion Rand trade surplus thus far in 2011, which is often a harbinger for a strengthening currency.

Don't expect major gains, though, as currencies strengthen or weaken at a relatively slow pace. Perhaps the best use of these currency funds is as a hedge to help eliminate any currency risk from foreign funds.

The distinction between developed and developing economies is quickly blurring. Countries throughout Asia, the Middle East and South America have established much more rigorous financial controls, increasingly sport sizable foreign currency reserves, and have growing middle classes. These emerging economies will surely hit speed bumps in the years to come, but they look set to deliver some of the strongest growth rates in the world over the next 10 to 20 years.

David Sterman has worked as an investment analyst for nearly two decades. He was a Senior Analyst covering European banks at Smith Barney and was Director of Research for Jesup & Lamont Securities. He also served as Managing Editor at TheStreet.com and Director of Research at Individual Investor magazine. His numerous media appearances over the years include CNBC and Bloomberg TV.