Market Overview

An ETF Idea For An Emerging Markets Rebound

An ETF Idea For An Emerging Markets Rebound

The MSCI Emerging Markets Index is down more than 8 percent this month, a decline that has whittled the benchmark's year-to-date gain to a meager 2.64 percent.

Data points like those are enough to discourage many investors from allocating to developing economies, but some emerging markets exchange-traded funds could be worth monitoring over the near term and be worthy of scooping if and when the U.S.-China trade controversy abates.

What Happened

The KraneShares Emerging Markets Consumer Technology ETF (NYSE: KEMQ) is one of the emerging markets ETFs investors may want to keep an eye on. Down almost 10 percent this month, it's clear KEMQ is being punished by several factors.

Those factors include a portfolio of growth stocks that have fallen out of favor as investors have moved away from riskier assets, simply being an emerging markets fund and substantial exposure to China. China, the world's second-largest economy, accounts for nearly 41 percent of KEMQ's geographic weight.

KEMQ, which debuted in October 2017, tracks the Solactive Emerging Markets Consumer Technology Index. While China usually looms large in emerging markets ETFs, particularly those funds focusing on consumer and technology stocks, KEMQ has some exposure to Latin America, a potentially lucrative Internet/technology region in its own right.

Why It's Important

In some cases, there are intimate links between China's and Latin America's Internet industries because the former has been a major investor in the latter's efforts to become an emerging market consumer technology player.

“According to a 2018 report by the Economic Commission for Latin America and the Caribbean, China has invested close to $90 billion in the region between 2005 and 2016,” according to KraneShares research.

Stocks from Brazil and Argentina, South America's two largest economies, combine for almost 12 percent of KEMQ's weight. What makes KEMQ potentially alluring for some investors is the noticeable discounts at which emerging markets stocks trade to U.S. equivalents.

The forward price-to-earnings ratio on KEMQ's underlying index is 17.87 times compared to 31.79 times on the Dow Jones Internet Composite Index, a basket of domestic Internet stocks. The forward price-to-book ratio on KEMQ's index is 2.53 times compared to 6.39 on the Dow Jones index, according to KraneShares data.

What's Next

“South America served as a good reminder that consumer technology is taking root across emerging markets and compared to the US valuations look compelling with plenty of catalysts that could drive performance,” said KraneShares.

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