Emerging Markets Consumer ETFs Roar Back To Life


The emerging markets consumer theme has been one marked by both peril and profit potential.

There is the unmistakable allure that, by some estimates, consumer spending in just China and India will reach $10 trillion per year by 2020. In the years leading up to 2020, the total is expected to be $64 trillion and that is just for China and India.

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Related: Prepare For Chindia's Consumer Spending Surge With ETFs.

Then there have been the times, such May and June of this year, when emerging markets consumer ETFs remind investors that these are, after all, emerging markets ETFs. That means when investors are not favoring developing world equities, consumer funds are not immune from the ensuing shocks.

However, emerging markets ETFs have picked up the pace in recent and investors putting cash to work with some of those funds. Consumer ETFs are not just going along for the ride, some are leading. Just look at the following group.

EGShares Emerging Markets Consumer ETF (NYSE:ECON) The EGShares Emerging Markets Consumer ETF is something of a gold standard among emerging markets consumer funds. ECON recently celebrated its third birthday and has over $1 billion in assets under management. Impressively, the fund has seen positive inflows this year, a remarkable feat given the billions in capital investors have yanked from other emerging markets ETFs.

ECON has been in rally mode. Since August 29, the fund has surged 12.5 percent. That performance is made all the more impressive when considering ECON's largest country weights do not trade at the discounted valuations of other emerging markets.

Mexico, South Africa, Brazil and India combine for nearly two-thirds of ECON's weight. Despite this year's emerging markets tumble, all of those markets are still considered expensive relative to the broader emerging markets universe. Speaking of South Africa, ECON's largest holding is South African media firm Naspers. Naspers happens to be one of the largest shareholders in Tencent Holdings, the Chinese Internet giant that has boosted several Internet ETFs this year.

EGShares Emerging Markets Domestic Demand ETF (NYSE:EMDD) The EGShares Emerging Markets Domestic Demand ETF is just over a year old and while it also hails from EGShares, it takes a different approach than ECON. EMDD is not limited exclusively to discretionary stocks, though its name might imply as much. Actually, the fund is conservatively positioned at the sector level with staples leading the way at 29.6 percent.

Discretionary names account for 27.4 percent of EMDD's weight, but telecom, utilities and health care combine for over 42 percent. Said another way, EMDD holds stocks of companies that produce goods and services emerging markets consumers need to buy with a sprinkling of discretionary names.

The thing is staples stocks almost always trade at rich valuations and that goes for the emerging markets versions as well. EMDD's index has a trailing P/E ratio of almost 19, high compared to other emerging markets benchmarks. To EMDD's credit, its recent performance justifies the premium valuation.

The fund has surged 11.3 percent since August 29. India, Mexico, China, South Africa and Brazil are EMDD's top country exposures and combine for about 79 percent of the fund's geographic weight.

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Disclosure: Author does not own any of the securities mentioned here.

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