How Consumer Friendly Is Your Emerging Market ETF?

by on January 22, 2013 | ETFs Mentioned:

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 as this sector presents a way to profit from favorable demographic shifts playing out in developing economies across the globe. 

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. Investors can utilize over 70 Emerging Markets ETFs to favorably position themselves as consumers overseas spur growth [see 101 ETF Lessons Every Financial Advisor Should Learn].

Emerging Consumers Are On The Rise

As these new consumers head to the global markets, investors shouldn’t rush to just any emerging market ETF. In fact, most of the broad-based emerging markets funds aren’t necessarily well positioned to benefit from the growing middle class, as many feature heavy tilts to energy and financial firms [try our Free ETF Head-To-Head Comparison Tool].

Emerging market consumer exposure is key for investors looking to favorably position themselves as rising rates of urbanization and income continue to spur growth overseas and drive global GDP [also check's Money Management Tips Center].

The table below compares the total allocation to consumer defensive and consumer cyclical equities along with the one year returns among five popular broad emerging market ETFs, revealing significant differences between them. Please also note that the size of each bubble is based on the total number of holdings in that ETF:

  • Emerging Markets ETF (VWO, A)
  • Emerging Markets Equity Income Fund (DEM, A-)
  • SPDR S&P Emerging Markets Small Cap ETF (EWX, A-)
  • Emerging Markets Equity ETF (SCHE, A)
  • FTSE RAFI Emerging Markets Portfolio (PXH, A-)

Of course, there’s no universally right choice from the above ETFs. For some investors, a consumer-heavy ETF makes sense; for others, a more balanced and deeper portfolio might be the way to go. 

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Disclosure: No positions at time of writing.