EGShares, the only ETF issuer to maintain a product line dedicated exclusively to emerging markets funds, announced today the latest addition to its lineup. The Emerging Markets Consumer Titans Index Fund (ECON) will be the first U.S.-listed ETF offering exposure to a corner of the market overlooked by many existing emerging markets ETFs: consumer goods and services. ECON will seek to replicate the Dow Jones Emerging Market Consumer Index, a benchmark that consists of retailers, automakers, food and beverage producers, and travel companies, among others.
As developed markets continue to sputter along, many investors have gravitated towards emerging markets, which continue to see robust population growth and amazing levels of economic activity. A few years ago, investors looking to play emerging markets through ETFs generally had two options: investing in a broad-based fund such as EEM or VWO or targeting individual economies through country-specific funds. But EGShares, along with other issuers including Global X and Claymore, have brought increased granularity to emerging markets through the launch of several sector-specific funds [use the ETF Screener to find all emerging market ETFs].
The investment thesis behind emerging markets equities is built around the consumers of the developing world. As emerging market populations continue to embrace urbanization–moving to cities and taking up non-agricultural employment–the size of the middle class in China, India, and other emerging economies is expected to expand significantly. As the middle class grows and becomes increasingly wealthy, demand for cars, cell phones, clothing, and other consumer products is expected to surge, becoming a major driver of GDP growth that is expected to tease double digits in some regions of the world. As millions of emerging markets citizens ascend to middle-class status, the consumer sector should be a primary beneficiary. “One of the primary secular drivers in today’s economic environment is that households in the developed world are deleveraging—spending less, saving more—while those in the emerging markets are moving in the opposite direction,” said Richard Kang, CIO and Director of Research at EGShares. “Although the median household income may be small in relation to developed markets, both the large size and young age of the emerging market population make this a key theme for both the near and long term.”
According to a study by McKinsey, spending of the emerging market middle class–which includes some 2 billion people–is expected to increase from about $7 trillion annually now to about $20 trillion in a decade. That level would represent about twice the current consumption of the U.S. And although multi-national firms will no doubt attempt to capture some of that market share, there is evidence to suggest that local firms will maintain the upper hand.
There are a number of statistics that illustrate the tremendous potential in the emerging market consumer sector, but perhaps the most powerful relates to automobiles. In India, there are currently about 12 motor vehicles for every 1,000 people. In China, that figure is even lower: automobile ownership rates stand at just 1%. That is significantly lower than the U.S., where there are three cars for every four people (or about 75 times higher than China).
Correcting A Sector Bias
The most popular ETFs for accessing emerging markets, the Vanguard Emerging Markets ETF (VWO) and iShares MSCI Emerging Markets Index Fund (EEM), seek to replicate the MSCI Emerging Markets Index, a cap-weighted benchmark that includes the largest publicly-traded companies in the developing world. The nuances of the index methodology introduce some important biases to the holdings of these funds; because the largest capitalizations tend to belong to banks and oil companies, EEM and VWO maintain heavy weightings to the financial and energy sectors. The consumer sectors often get the short end of the stick in international equity ETFs; consumer goods make up about 9% of EEM, while consumer services accounts for only about 3% of holdings.
For investors who are truly bullish on the outlook for emerging markets, it may make more sense to maintain exposure to companies that will thrive from a growing middle class, instead of oil and natural gas companies [see Inside The Small Cap India ETF]. So ECON might make sense as a complement to core positions in cap-weighted emerging market ETFs, increasing the allocation to the consumer sector that may be more of a “pure play” on emerging market economies.
ECON Under The Microscope
The new consumer ETF tracks the Dow Jones Emerging Market Consumer Index, which consists of 30 companies in the consumer goods and consumer services sectors. The index spreads its assets out across a variety of emerging markets, with a tilt towards Latin American markets. This region accounts for nearly half of total assets, with Mexico (20%), Brazil (16%), Chile (2%), and Colombia (2%) all receiving meaningful allocations. Additionally, India, South Africa, and Malaysia also receive sizable weightings, ensuring that the fund has adequate diversification across emerging market regions [see Beyond EWZ: Five Other Latin America ETF Options].
In terms of consumer sectors, ECON’s largest weightings are to automobiles & parts (16%), food producers (15%), beverages (14%), and travel & leisure (12%). Among the largest individual holdings are AmBev, Wal-Mart de Mexico, and Astra International 6%. The holdings are split relatively evenly between consumer goods and consumer services.
While ECON is the first ETF to offer broad-based exposure to emerging markets consumer sector, it joins two country-specific funds focusing on consumers in individual BRIC markets; the China Consumer ETF (CHIQ) and the Brazil Consumer ETF (BRAQ). This new fund from Emerging Global brings the size of the firm’s lineup nine, all of which target different corners of the emerging world. Included among those are several sector-specific funds offering exposure to various emerging markets, as well as funds targeting the infrastructure sectors in India, Brazil, and China [also read Brazil's Lagging Infrastructure; Time To Buy BRXX?].
Disclosure: No positions at time of writing, photo is courtesy of Marcelo Matarazzo.