Checking In: The "Other" EM Consumer ETF (EMDI, ECON, COH)
One emerging markets theme that investors have honed in on over the past few years is the suppose rise of the consumer. From Bangkok to Beijing to Moscow to Mumbai, the emerging markets consumer isn't just a group of people numbering in the billions, it's an investment thesis that is supposed to be a boon for everything from cattle prices to stocks such as Coach (NYSE: COH) and Tiffany (NYSE: TIF).
ETF sponsors have seized upon the emerging markets consumer theme by rolling out funds such as the EGShares India Consumer ETF (NYSE: INCO) and the EGShares Emerging Markets Consumer ETF (NYSE: ECON). With over $370 million in assets under management, ECON has proven to be popular with investors. Both ECON and INCO have offered solid returns in 2012.
Maybe it's the success of ETFs such as ECON or maybe it's just the allure of the emerging markets consumer, but whatever the reason is, ETFs focused on emerging markets consumers continue to sprout up. One of the newest kids on that block is the iShares MSCI Emerging Markets Consumer Discretionary Sector Index Fund (Nasdaq: EMDI), which debuted in February.
To its credit, the iShares MSCI Emerging Markets Consumer Discretionary Sector Index Fund has done an admirable job of attracting investors' cash. EMDI now has almost $10.4 million in AUM, not a bad haul for just two months of work. EMDI is home to 88 stocks and an expense ratio of 0.69%, numbers that compare favorably with the 30 stocks featured in ECON and the 0.85% charged by that fund.
However, there are some critical differences between the two funds. ECON trades an average of almost 125,200 shares per day. EMDI is at less than 400 shares per day. The fund has traded just 100 shares today and when it traded on Tuesday, it was the first time any EMDI shares had changed hands in almost a week.
EMDI also offers little in the way of county or sector diversity. At the country level, South Korea, China and South Africa combine for about 70% of the fund's weight with South Korea really leading the charge at over 33%. At the sector level, auto manufacturers receive an allocation of almost 34%.
On the other hand, ECON uses four countries – Mexico, Brazil, South Africa and India – to occupy just under two-thirds of the fund's weight and six industry groups receive double-digit allocations.
ECON and EMDI do share some of the same holdings and there is some duplication within the ETFs' top-10 constituents, but EMDI is more heavily allocated to companies operating in multiple countries, including some developed markets.
That frames EMDI as more conservative than ECON and it might explain why the iShares fund has performed better in the past month, but the focus on multi-national firms exposes a flaw in EMDI. The flaw being that emerging markets consumers are still partial to their local brands. Those companies have established rapport with consumers in emerging markets and ECON is more levered to those firms.
Should emerging markets ETFs snap out of their recent lull, then ECON would likely trump EMDI in terms of performance due to its country diversity and superior allocation to companies focused on local markets.
To find out more about emerging markets consumer ETFs, please click HERE.
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