The Definitive Guide to EM Consumer ETFs
Not surprisingly, emerging markets investing long ago went mainstream and one byproduct of that has been a growing curiosity about consumers in developing nations. Over the past several years, Western investors have been inundated with media accounts about the new rich in markets ranging from China to India to Brazil.
Rankings of per capita GDP derived from purchasing power parity highlight just how frustrating playing the emerging markets consumer can be for investors. Of the BRIC nations, Russia looks good by comparison ranking 57th in the world last year in terms of per capita GDP. On the other hand, India's rank of 136th doesn't look so good.
Despite the vexing proposition that is the emerging markets consumer, ETF issuers have continued to bring funds to market that focus on this theme.
Here is the definitive guide to such ETFs:
EGShares Emerging Markets Consumer ETF (NYSE: ECON) The EGShares Emerging Markets Consumer ETF can be viewed as the ETF that started it all when it comes to ETF plays on consumers in developing nations. Just a few weeks shy of its second birthday, ECON now has over $420 million in assets under management.
A knock on ECON is that it has only returned 6.4 percent this year, a performance that trails more noteworthy multi-country funds such as the Vanguard MSCI Emerging Markets ETF (NYSE: VWO). That said, there are some nifty aspects to ECON.
For starters, the fund's sector weightings are not focused on discretionary spending. With beverage names and food and drug retailers accounting for 31 percent of ECON's weight, the bias here is clearly toward staples. A combined 17 percent allocation to food and tobacco names cements the fund's staples bias.
Oddly enough, ECON features no exposure to China. In fact, India and Malaysia are ECON's only Asian country weights. Mexico, Brazil and Chile combine for over 47 percent of ECON's weight. The almost 20 percent allocation to Mexico could serve ECON well going forward as some well-known investors have recently been touting the consumer story in Mexico.
iShares MSCI Emerging Markets Consumer Discretionary Sector Index Fund (NASDAQ: EMDI) ECON has a pseudo rival in the form of newly minted EMDI, though the iShares offering has lead an anonymous existence since its February debut. The knocks on EMDI are obvious. It has only attracted $2.4 million in AUM since coming to market and average daily volume of just over 400 shares is bound to chase some investors away.
At the country level, the fund is dominated by South Korea and South Africa, which represent almost 52 percent of EMDI's weight. China, Brazil and India round out EMDI's top-five country weights. EMDI has tumbled 8.2 percent this year.
EGShares India Consumer ETF (NYSE: INCO) The EGShares India Consumer ETF is one of three country-specific emerging markets consumer ETFs on the market today. INCO, which recently celebrated its first birthday, leads an anonymous existence to the point that some analysts have speculated the fund will not be around forever.
That is a tough call to make, especially when INCO has gained 20.3 percent year-to-date. INCO shares two important things in common with ECON. First, it is pricey. In the case of INCO, that means annual fees of 0.89 percent. Second, INCO is more allocated to the conservative end of the consumer spectrum.
Translation: Personal goods and food names represent 41 percent of INCO's weight while beverage and tobacco stocks chip in another 17 percent.
Global X China Consumer ETF (NYSE: CHIQ) With scores of new millionaires and some new billionaires, China has often been viewed as the prime example of just how compelling the emerging markets consumer theme can be for foreign investors. CHIQ has certainly benefited from that theme by attracting $109.3 million in AUM debuting in November 2009.
CHIQ is home to 40 stocks and its valuation metrics do not imply a richly valued fund. The ETF's price-to-earnings ratio is currently 14.7 and its price-to-book ratio is 1.47, according to Global X data.
CHIQ's performance relative to the iShares FTSE China 25 Index Fund (NYSE: FXI), the largest China ETF, is interesting. Year-to-date, FXI is the clear winner. Over the past month as risk appetite has increased somewhat, CHIQ has topped FXI by over 300 basis points.
Global X Brazil Consumer ETF (NYSE: BRAQ) In a year in which larger, more well-known Brazil ETFs have struggled, BRAQ has been a source of strength for investors looking to be involved with Latin America's largest economy.
BRAQ turned two-years-old in July, but it is nowhere near the size of CHIQ with just $22.8 million in AUM. However, BRAQ has one important factor in its favor. Over the past year, year-to-date, the past six months and the past three months, BRAQ has easily outperformed the iShares MSCI Brazil Index Fund (NYSE: EWZ), the largest Brazil ETF.
BRAQ is more of a mid-cap play as the average market capitalization of its constituents is about $3.8 billion. That is not a bad thing as it means BRAQ avoids exposure to struggling Brazilian large-caps such as Petrobras (NYSE: PBR) and Vale (NYSE: VALE).
EGShares Emerging Markets Domestic Demand ETF (NYSE: EMDD) The EGShares Emerging Markets Domestic Demand ETF is the new kid on the block among emerging markets consumer funds. EMDD debuted just last week so it is not yet fair to judge the fund on its AUM and volume metrics.
However, the new ETF does offer up an interesting way of playing developing world consumers. That is a focus on internal consumption. A large part of the allure of emerging markets is the export stories that drive many of these economies. That is a great story when global growth is not slowing. Global growth is slowing today and that puts a premium on finding emerging markets that either have strong internal consumption trends or are trying to get there.
Mexico accounts for almost 25 percent of EMDD's and as was noted earlier, investors are starting to warm to that country's consumer stories. Some of EMDD's small country weights such as Indonesia and Malaysia are seeing improving domestic demand trends.
China, India, South Africa and Brazil combine for 55 percent of EMDD's weight. That presence is obviously significant and it implies EMDD will need at least two of those four nations to see improved economic trends sooner than later to help drive the new fund's returns.
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