As the ETF industry continues its rapid expansion, investors now have over 1,400 products to choose from to fit their every investment whim. But perhaps one of the key factors in selecting an appropriate fund is the level of diversification it offers to a portfolio. International and emerging market equity ETFs have certainly proven to be great diversifying agents, as their uncorrelated returns have brought new and lucrative opportunities [see also How To Pick The Right ETF Every Time].
But when it comes to the task of choosing which country to add exposure to, the methodologies can be vastly different. Deloitte Global Services has taken a perhaps unconventional approach to the global markets by focusing on what they call “Hidden Cities.” In their research, Deloitte identified several cities from various emerging market economies that exhibit the following characteristics: large and affluent populations, a strong consumer market, and being the dominant cities in countries with good economic growth prospects.
Deloitte argues that cities “are where learning and innovation take place, where industry is initially concentrated, and where the services that support a modern economy are located … and in emerging markets, the money will be in cities.” For investors wanting to find potentially lucrative growth opportunities and cash in on these “hidden cities,” we outline several ways to play [see our Free Country Exposure Tool]:
Located in the politically corrupt and often unstable nation of Columbia, Bogota perhaps does not come to mind when thinking of powerful emerging market cities. Despite its country’s turmoil, the city has flourished in recent years, solidifying its place as a commercial and industrial center as well as a lucrative transit site for Colombia’s large agricultural output. As the nation continues its fight against drug violence, Bogota has already seen an inflow of business visitors from abroad, causing the city’s hospitality sector to grow tremendously in recent years.
There are currently only two ETFs the feature targeted exposure to Columbia: the InterBolsa FTSE Colombia 20 ETF (GXG) and the Market Vectors Colombia ETF (COLX). Both funds are tilted towards the financial services and energy sectors, though Van Eck’s COLX offers exposure to more mid, small and micro cap firms, which generally better represent the local economy.
Chongqing is home to over 28 million people and is considered to be the commercial center and economic hub of the Sichuan province. With the help of the Chinese government, the city is currently undergoing a shift towards attracting export-oriented manufacturers, which previously focused only on coastal cities. As a result, Chongqing’s local economy grew 16.4% in 2011, compared to China’s nationwide growth of 9.2% [see also BRIC-or-Bust ETFdb Portfolio].
Though there are multiple options to choose from, these three ETFs may provide greater exposure to this growing city:
Ho Chi Minh City, Vietnam
Formerly known as Saigon, Ho Chi Minh City is the largest city in Vietnam and accounts for roughly 20% of GDP and 28% of industrial output. In addition, modern retailing has grossly expanded in recent years, as residents of the city become more powerful consumers with higher discretionary spending power. Currently, there is only one ETF that offers exposure to Ho Chi Minh: the Market Vectors Vietnam ETF (VNM).
Indonesia’s capital city of Jakarta is home to about 10 million people, and it is the center of commerce and government. Over the last few years, Jakarta has seen rapid economic growth in the government, financial services, trade and manufacturing sectors. There are three Indonesia-targeted ETFs available on the market, with Van Eck’s IDX being the largest and cheapest option [see also 5 ETFs For Fiscally-Sound Emerging Markets]:
- Market Vectors Indonesia Index ETF (IDX)
- Market Vectors Indonesia Small-Cap ETF (IDXJ)
- MSCI Indonesia Investable Market Index Fund (EIDO)
Formerly known as Calcutta, Kolkata is one of the largest, yet sometimes most over-looked, cities in India. A recent influx of investment capital in areas such as information technology and business process outsourcing has allowed the city’s local economy to experience relatively high growth over the last few years. Kolkata has an abundance of skilled labor and a relatively low cost of living, making it a prime target for both foreign and Indian multinational investment.
In the India ETF space, there are numerous options, including the largest and most popular product, WisdomTree’s India Earnings Fund EPI. For a small cap twist, SCIF is an appealing choice, while EG Shares’ INCO focuses on the consumer sector of the Indian equities market.
Although Nigeria is a poor country, its former capital of Lagos is the center of wealth, with residents’ per capita GDP being nearly 60% higher than the nation’s average. Nigeria being one of the largest exporters of oil has helped the city flourish in recent years, though investments in non-oil sectors have also begun to increase.
Currently, there is only one ETF that offers significant exposure to the city: Van Eck’s Market Vectors Africa Index ETF (AFK), which allocates roughly 20% of total assets to Nigerian equities [see Africa-Centric Portfolio].
Accounting for nearly one-third of the population of Peru, Lima typically does not attract much attention, though the city makes up roughly 60% of the country’s GDP. As residents become more affluent, the metropolitan retail sector continues to grow rapidly, attracting foreign investors to capture market share.
iShares’ MSCI All Peru Capped Index Fund (EPU) is the only product available to investors looking for targeted exposure to this Latin American country. It should be noted, however, that nearly half of the portfolio is allocated to basic materials stocks.
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Disclosure: No positions at time of writing.