Emerging Markets ETFs: Where’s The Consumer Exposure?

by on April 28, 2010 | ETFs Mentioned:

As the economic recovery has taken root over the last year, one of the most interesting developments has been the widening gap between the emerging and developed economies of the world. High unemployment rates and mounting government debt continue to weigh on the U.S. and much of Europe, while Japan battles the additional forces of a stubbornly strong currency and potential deflation. While a return to positive GDP growth appears likely in many of these countries, the economic expansion pales in comparison to growth occurring in many of the so-called emerging and frontier markets. China’s economy is racing ahead, putting it on pace to claim the title of the world’s second-largest economy before the year ends (and perhaps surpass the U.S. in the not-so-distant future). Brazil is booming, thanks to an abundance of natural resources and ongoing government spending. Beyond the BRIC, there are patches of even more impressive growth; Singapore recently reported first quarter GDP growth of 32%.

Many investors attribute the rapid growth in emerging markets in large part to ongoing urbanization and growth of the middle class; as citizens of emerging markets leave agricultural jobs behind to find higher-paying employment in an urban setting, disposable income and quality of life are on the rise. That all translates into more spending, particularly on “big ticket” items that would have been far out-of-reach for those living in parts of emerging markets not yet touched by developed infrastructure.

So whereas emerging market economies have historically been driven by industry and exports, many believe that future growth will come from domestic spending and a surging consumer market.

The consumer sector may be the growth driver of tomorrow, but it’s tough to find in the emerging markets ETFs of today. Many of the most popular ETFs in the Emerging Markets Equities ETFdb Category (as well as the China and Latin America categories) make only a minimal allocation to the consumer sector, concentrating exposure instead on energy companies and financial firms. Because many of these funds are based on cap-weighted benchmarks, they consist of the largest companies in the respective regions–generally banks, energy giants, and industrial stocks.

Below, we highlight several of the most popular emerging markets ETFs. Based on their fact sheets, none of them allocate more than 5% to the consumer discretionary sector, while all of them allocate at least 40% in aggregate to the energy and financial sectors:

Ticker ETF Consumer Discretionary Energy Financials
EEM MSCI Emerging Markets Index Fund 4.6% 15.0% 25.1%
FXI* iShares FTSE/Xinhua China 25 Index Fund 1.4% 11.9% 46.9%
EWZ iShares MSCI Brazil Index Fund 3.9% 25.2% 21.3%
INP iPath MSCI India Index ETN 4.6% 16.6% 24.1%
RBL SPDR S&P Russia ETF 1.0% 43.2% 10.6%
*Reflects consumer goods allocation. Source for all: ETF fact sheets

ETF Alternatives

While these particular ETFs may not offer exposure to the consumer sector of emerging market economies, there are a handful of interesting products that do. The SPDR S&P Emerging Markets Small Cap ETF (EWX) seeks to replicate the performance of the S&P Emerging Markets Under USD2 Billion Index, a benchmark that represents the small capitalization segment of emerging countries. Because this ETF avoids exposure to mega-cap companies, it doesn’t hold any of the big state-owned oil and gas firms or financial institutions that make up a big portion of most emerging markets ETFs. EWX’s largest allocation is to technology (about 22%) and industrials (18%). The 16% allocation given to the consumer discretionary sector is significantly larger than all of the ETFs profiled above, giving this fund a potentially unique risk/return profile (see the fact sheet for EWX).

There are also several country-specific small cap ETFs that offer more significant exposure to the consumer sector. The Claymore/AlphaShares China Small Cap ETF (HAO) gives significant weightings to both consumer discretionaries and technology, while about 30% of the Market Vectors Brazil Small-Cap ETF (BRF) consists of consumer stocks (see this Guide To Small Cap International ETFs).

For investors seeking pure play exposure, the Global X China Consumer ETF (CHIQ) is an interesting option. This ETF tracks the performance of the S-BOX China Consumer Index, a benchmark made of companies operating in the consumer sector and domiciled in China. CHIQ’s components include retail firms, food and beverage companies, carmakers, and household goods (see CHIQ’s fact sheet).

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Jared Cummans contributed to this article.

Disclosure: No positions at time of writing.