A Targeted ETF to Capture Emerging Market Growth

Markets ETF Trends

A consumer emerging market exchange traded fund can provide investors targeted exposure to a quickly growing segment of developing global economies.

Continue Reading Below

On the recent webcast, The Emerging Markets Consumer is Online, Kevin Carter, Founder of EMQQ Index, pointed to five factors that support emerging market growth, including diversification benefits, total population, favorable demographics, economic growth and recent underperformance.

Richard Kang, Advisor for EMQQ Index, took a look at developing economies, with a specific focus on e-commerce and internet companies as a way to target the growing consumer base.

The emerging markets have exhibited diversification benefits, compared to U.S. and other developed markets, providing correlations that are less than 1.0 to the S&P 500. The developing world make up 85% of global population and 50% of global GDP. There is a much larger younger population in emerging countries than developed countries. The emerging markets are also characterized by faster growth rates. Lastly, after the recent multi-year underperformance, emerging stocks look undervalued and attractively priced, compared to U.S. equities.

Looking ahead, Carter pointed out that emerging market gross domestic product could eventually over take many developed markets. For instance, according to the World Bank, China and India’s economies could become larger than the U.S. by 2050.

Continue Reading Below

Most investors seem to be underweight the emerging markets, at least based on global market capitalization. In a survey of financial advisors on the webcast, the majority of respondents, or 30.0%, indicated that they have a 5% to 6% allocation toward the emerging markets, followed by 22.6% of respondents showing a 3% to 4% allocation. In contrast, the emerging markets make up about 10% of the MSCI All Country World Index. However, 65.6% of advisors indicated that they will be increasing their emerging market exposure over the next six months.

The emerging consumer could sell to 4.2 billion people by 2025, with emerging market consumption accounting for $30 trillion, or almost half of the global total, Carter said.

In the current age of communications, technology and innovations are also playing a huge role in growth.

“What matters now is a combination of emerging countries, emerging themes and emerging innovations,” Carter said.

For instance, Carter pointed to smartphones as a major industry disruptor that has shifted the way emerging consumers spend, notably through internet retailers or e-commerce purchases as internet access grows. He pointed out that smartphone shipments have overtaken both mobile phone and personal computer shipments, which reflects the huge demand for portable devices.

Meanwhile, internet infrastructure continues to grow, allowing emerging markets greater access to the global network. As of 2014, 31.0% of emerging market households had internet access, which suggest that through greater penetration, emerging consumers may continue to adopt more online purchases.

ETF investors interested in this growth opportunity can gain exposure to the targeted emerging market segment through the Emerging Markets Internet & Ecommerce ETF (NYSEArca: EMQQ), which focuses on internet names, notably those that cater toward online shopping or e-commerce.

EMQQ includes exposure to the growth of online consumption in the developing world. Specifically, the ETF includes large internet names like Alibaba Group Holdings 9.3%, Tencent Holdings 8.3%, Naspers TLD 7.2%, Naver Corp 6.3% and Baidu Inc. 6.2%. The fund also has diverse country exposure, including India, China, Brazil, Turkey, Nigeria and Indonesia.

Financial advisors who are interested in learning more about the emerging markets can watch the webcast here on demand.

This article was provided by our partners at ETFTrends.