ETFs To Play The Emerging Markets Consumer

by on October 11, 2010 | ETFs Mentioned:

In the wake of the recent recession, many Americans are now acutely aware of the perils of maintaining mountains of personal debt, and have taken steps to reduce credit card balances and pay down other obligations. While many have struggled to get debt burdens under control, much of the developed world has seen a material reduction in outstanding credit card balances; in 2009, aggregate credit card balances of U.S. consumers fell an impressive 8.7% according to a recent study from financial consultancy Lafferty Group.

The increasingly large growth gap between the world’s emerging and developed markets has been highlighted by countless statistics in recent months, but the discrepancy in personal indebtedness serves as yet another reminder. According to the same study, credit card balances for credit card consumers in China rose more than 17% last year, while Brazilians increased balances by nearly 30%. Those figures are the result of the urbanization trend that has emerged as a major driver of global GDP growth going forward: as emerging markets citizens move to cities and take up their first non-agricultural employment, both the size of the middle class and amount of disposable income swells. As the newest members of the middle class embrace credit and a higher quality of life, demand for items such as automobiles, clothing, and electronics has surged [see Brazil ETFs: Nine Ways To Play].

Those numbers may sound alarming at first, but in reality represent the emerging world catching up to the U.S. and other advanced economies. “More people going into debt might not sound like a desirable development, but in some ways this could be,” writes Mark Whitehouse. “One of the global economy’s biggest problems has been its dependence on an overstretched U.S. consumer. If folks in places such as China and Brazil are now stepping up and taking on some of the burden, that could provide some much-needed rebalancing.” [see Emerging Market ETFs: Where's The Consumer Exposure?]

Obviously, an overleveraging in emerging markets would lead to trouble down the road. But the huge increase in aggregate credit card balances in the developing world are far from being a cause for concern. While the decrease in credit card balances in the U.S. reflects efforts to cut household debt, the increases in emerging markets is driven in large part by an increase in the number of credit card users. And there is still a long ways to go before catching up to the developed world. The Lafferty study indicated that as of 2009 the credit card balances of the four BRIC economies–Brazil, Russia, India, and China–had reached $143 billion. By comparison, credit card debt in the U.S. was almost $850 billion, or roughly six times the aggregate amount in the world’s four largest emerging markets. In India, which some investors believe has the greatest long-term economic potential, more than half the middle class doesn’t yet have a credit card [see Playing Emerging Markets Through Small Caps].

ETFs For Emerging Markets Consumers

Consumer spending in emerging markets is expected to explode over the next ten years or so. According to a recent study from McKinsey, middle class consumer spending in emerging markets will grow from about $7 trillion at present to $20 trillion over the next decade. While assets in emerging markets ETFs have surged in recent years, much of the growth has been in large-cap heavy funds that are tilted towards the energy and financials sectors. But several products have launched in recent months offering investors a way to access the consumer sector of the world’s emerging markets:

  • EGShares Dow Jones Emerging Markets Titans Consumer ETF (ECON): This ETF is the most diversified option, maintaining exposure to approximately 30 consumer companies in about ten different emerging market economies. Within the consumer sector, the exposure offered by ECON is spread across a number of businesses, with material allocations to automobile manufacturers, food and beverage producers, travel and leisure firms, retail companies, and even tobacco stocks. ECON is a relatively new ETF–it launched in September–but has already racked up more than $30 million in assets and has jumped by almost 8% since inception.
  • Global X China Consumer ETF (CHIQ): This ETF focuses on the consumer sector in China, which is expected to thrive as the movement towards cities continues and the Chinese economy begins a gradual transformation towards a model driven by local consumption as opposed to exports. CHIQ holds about 40 individual stocks, which include carmakers, airlines, beer companies, and food producers [also read the Case For The China Consumer ETF].

  • Global X Brazil Consumer ETF (BRAQ): This ETF offers exposure to the consumer sector in South America’s largest economy, seeking to replicate an index consisting of about 30 Brazilian stocks. BRAQ is also a relatively new ETF but it has gained a whopping 30% since its launch earlier this year.

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Disclosure: No positions at time of writing, photo is courtesy of Agnieszka Bojczuk.