ETFs To Tap Into Emerging Market Consumers: Six Ways To Play

by on August 24, 2011 | ETFs Mentioned:

Interest in emerging markets has surged in recent years, and investors have embraced ETFs as the preferred means of accessing this asset class. Emerging markets have been established as the clear leaders of global GDP growth, while the economies of the United States and much of Europe have stalled. Developed markets are facing stubbornly high unemployment and limited flexibility thanks to mounting debt burdens, while emerging markets continue to race ahead. Broad-based funds, such as EEM and VWO, are by far the most popular options for tapping into this asset class. Both of these two funds are linked to the MSCI Emerging Markets Index, a benchmark that includes the largest publicly-traded companies in the developing world. These massive funds are not without their flaws however, as both of these ETFs are tilted towards large cap equities, with a sector bias towards financial and energy holdings.

Thanks to booming interest in developing economies, investors now have access to more granular options for fine tuning their emerging markets exposure [see our Emerging Markets ETF Center]. Many country-specific funds have seen huge inflows in assets, led by RSX ($2.2 billion), EPI ($1.2 billion), and EWM ($1 billion). Innovation in the ETF industry has also given investors tools to target specific sectors within the emerging markets universe as well. Just as the Sector SPDRs (and other suites of sector-specific offerings) slice up the U.S. market, there are now a number of funds that offer targeted exposure to certain industries within emerging market economies. Exposure to the consumer sector in particular has become important to investors, and there are a number of ETFs that offer access to this space.

Case For EM Consumer Exposure

While Americans have turned their focus to savings and repairing damaged balance sheets, many consumers in emerging markets have begun to discover the joy of spending sprees, fueled by rising income levels, increased financial security, and optimism over their economic futures. Exposure to consumer focused companies may be appealing to investors with a long-term time horizon because this sector presents a way to profit from favorable demographic shifts playing out in developing economies across the globe [see ETFs To Play The Emerging Markets Consumer].

As the emerging markets of the world urbanize and move away from rural areas, many take on non-agricultural employment for the first time and find themselves with a new luxury: discretionary income. That translates into increased demand for cars, electronics, jewelry, and other items that would have previously been out of reach [see Emerging Market ETFs: Where's The Consumer Exposure?]. For example, in 2010 roughly half of the Chinese population lived in cities, and experts are expecting this number to climb to 70% by 2035. Rising levels of discretionary income coupled with increasing rates of urbanization are all favorable demographic factors supportive of a booming consumer goods sector across emerging market economies.

Increased discretionary spending will benefit multinational companies as well; China is a key growth area for everyone from Coke to General Motors. With that being said, there is some evidence to suggest that local companies maintain a decided advantage over their Western counterparts. China’s beer market, the largest in the world, demonstrates this concept; domestic companies have seen market share increase dramatically in recent years, while Western companies have struggled to gain a foothold.

Consumer ETFs: From ECON To CHIQ

For U.S. investors seeking pure play exposure to emerging markets consumer sectors, there are a number of ETF options available, including both broad-based and country-specific choices which we have highlighted below [also consider Sector Investing With Emerging Market ETFs]:

EGShares Dow Jones Emerging Markets Consumer Titans ETF (ECON)

The most popular emerging markets consumer ETF is ECON, a fund that consists of about 30 stocks of consumer goods and consumer services companies in emerging markets. Like all offerings from EGShares, ECON excludes quasi-developed markets such as Taiwan and South Korea; instead, the largest country allocations in this ETF are Mexico, Brazil, and South Africa. Also included are India, Chile, Malaysia, China, Russia, and Colombia.

While ECON is focused exclusively on the consumer sector, there is a fair amount of diversification within this segment of the market [see Case For The Emerging Markets Consumer ETF]. The portfolio includes both consumer discretionary and consumer staples companies from various sub-sectors, including auto manufacturers, food producers, media stocks, and travel and leisure companies [see ECON Fact sheet].

EGShares Consumer Goods GEMS ETF (GGEM)

This ETF is likely flying under the radar for most investors because it doesn’t have the liquidity to support an active trading community. Nonetheless, GGEM is an appealing instrument that gives investors access to a portfolio consisting of the 30 largest emerging-market companies in the Consumer Goods Industry. One drawback of GGEM is that the fund allocates just over two-thirds of its total assets in the top ten holdings alone, potentially increasing the level of company-specific risk.

GGEM focuses primarily on defensive consumer staple companies in the food products industry, while also allocating balanced exposure to beer, car, and tobacco companies. Top three allocations by country include India, Brazil, and Mexico, while Indonesia, China, and Malaysia also account for sizable chunks, giving this ETF a heavy tilt towards Asian consumers [see GGEM Fact Sheet].

EGShares Consumer Services GEMS ETF (VGEM)

This offering from EGShares is similar to GGEM and ECON from a portfolio construction perspective, it too offers top-heavy exposure to a basket of 30 companies. VGEM however gives investors access to consumer service companies instead, making for an appealing option for rounding out exposure to all corners of the emerging market consumer industry.

When considering its industry breakdown, VGEM dedicates one-third of total assets to food retailers & wholesalers, while retailers and broadcasting & entertainment companies receive the next largest allocations. This ETF may also appeal to investors looking to diversify consumer exposure beyond the economic regions targeted by the other products in the space. The top three countries are Mexico, South Africa, and Chile, while exposure to the booming Chinese and Malaysian markets comes next [see VGEM Fact Sheet].

EGShares India Consumer ETF (INCO)

This is another fairly new product to hit the market and it’s the first of its kind to offer exposure exclusively to companies in the booming consumer sector of India. INCO tracks the performance of 30 companies and it does an excellent job of giving investors well diversified exposure across every corner of the lucrative Indian consumer sector. The top industries represented in INCO’s portfolio are automobiles, personal products, media, and textiles. Recently, the largest allocations went to Hindustan Unilever, Asian Paints Ltd., and Dabur India Ltd suggesting a heavy focus on home-grown brands [see INCO Fact Sheet]. ”We believe that INCO’s portfolio companies all have strong local brands, which could be beneficial as Indian consumers have continuously shown a preference for domestic brands over foreign imports,” said Robert C. Holderith, Founder and President of Emerging Global Advisors, in a press release announcing the fund’s launch.

Global X China Consumer ETF (CHIQ)

CHIQ is a very popular product amongst investors seeking emerging market exposure given its hyper-targeted focus on the booming Chinese consumer sector. In total, CHIQ contains just over 40 holdings, of which the top ten account for approximately half of the ETF’s assets. Despite its top-heavy portfolio, this fund’s underlying holdings appear to be well positioned to profit from the growing Chinese consumer base and the increases in discretionary spending [see Special Research Report: China ETFs In Focus]. Top allocation by industry include retail, food, and automobiles, while consumer services and personal & household goods also account for significant chunks.

Investors should keep in mind that the majority of CHIQ’s holdings are giant and large cap companies. While this may make for a safer investment, it can also negate some exposure to the particular sector as these major companies tend to do business all over the world rather than just profiting from the favorable demographic trends in China [see CHIQ Fact Sheet].

Global X Brazil Consumer ETF (BRAQ)

The Brazilian economy has expanded at a blistering pace over the past few years and the country has seen consistently rising levels of urbanization, showcasing the importance of having exposure to its consumer sector [see Brazil ETFs: Nine Ways To Play]. BRAQ has a fairly shallow portfolio of 30 holdings and it allocates half of its total assets in the top ten companies alone. This ETF, however, does a fine job of spreading out exposure across all market cap levels, avoiding the common pitfall of overweighing large cap companies that many emerging market funds fall into. The majority of the fund’s holdings are mid cap size companies, which can also allow for more “pure play” exposure to the local consumer market. Top allocations by industry include food & beverage and retail, while significant allocations are also made to household goods and travel & leisure companies [see BRAQ Fact Sheet].

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Disclosure: No positions at time of writing, photo is courtesy of Remi Boissonnas.