Two ETFs Targeting Emerging Market Middle Class Growth

May 3rd at 7:00am by Tom Lydon

When selecting any exchange traded fund, it is important to consider the weightings. In emerging market funds, these weightings tend to lean toward exporters, government-owned entities or high concentrations in specific sectors. ETF investors, though, may opt to single out a promising area, instead.

The rising middle class is the underpinning factor in the emerging markets, and Morningstar ETF analyst Patricia Oey suggests investors should look for funds that have a high exposure to consumer firms to capitalize on this growing trend. [ETF Performance: A Selective Approach to Emerging Markets]

Two emerging market ETFs exhibit low volatility relative to the MSCI Emerging Markets Index and include high-quality, large-cap consumer name brands. [Emerging Market ETFs Capture the Next ‘Engine of Growth’]

EGShares Emerging Markets Consumer ETF (NYSEArca: ECON) tracks 30 large-cap emerging market consumer companies. Since it only includes large, well-established names, the fund has been less volatile than the MSCI Emerging Markets Index. ECON has an expense ratio of 0.85%.

“The fund’s thesis is a logical one: Emerging-markets consumers increasingly are reaching middle-class status and have more disposable income to spend on everything from cars and electronic gadgets to processed foods and beverages,” Oey said in a research note. “In addition, many emerging-markets economies have generally young populations as well.”

Top holdings include Cia de Bebidas das Americas 10%, Naspers 7.6% and Wal-Mart de Mexico 6.8%. Top sectors include beverages 15.8%, general retailers 15.7% and food producers 13.2%. Country weightings are Mexico 19.4%, Brazil 17.4%, South Africa 17.4%, India 12.6%, Chile 10.3% and Malaysia 6.8%.

It should be noted that the allegations of venal agreements between Wal-Mart de Mexico and the government may weigh on the fund in the near term, Oey added.

WisdomTree Emerging Market SmallCap Fund ETF (NYSEArca: DGS) follows a dividend-weighted index, which holds value-oriented small-cap stocks. DGS has an expense ratio of 0.63%.

“Since this fund’s inception, it has earned higher absolute and risk-adjusted returns than the market-weighted MSCI Emerging Markets Small Cap Index,” Oey said. “This outperformance, combined with DGS’s relatively lower volatility, suggests that a dividend-focused strategy could be a viable strategy in emerging markets.”

Top holdings include Pretoria Portland Cement 1.1%, Cia de Saneamento de Minas 1.1% and Life Healthcare Group Holdings 1.0%. Top sectors include financials 21.7%, industrials 19.4% and consumer discretionary 13.3%. Top country weightings include Taiwan 25.3%, Thailand 13.0% and South Africa 10.8%.

Oey also noted that the high weighting in financials should benefit from greater demand from consumer banking and property development tied to consumer growth.

For more information on developing countries, visit our emerging markets category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

Tickers

DGS ECON