It’s been a very tough year for emerging market ETFs and talk the Federal Reserve will soon taper its bond purchases is only adding to the pain.
Investors have pulled more than $11 billion from the two largest developing country ETFs, Vanguard FTSE Emerging Markets (NYSEArca: VWO) and iShares MSCI Emerging Markets (NYSEArca: EEM), so far in 2013.
However, a specialized emerging markets ETF that focuses on consumer firms has been able to buck the outflow trend.
EGShares Emerging Markets Consumer ETF (NYSEArca: ECON) has gathered $373 million of inflows year to date, according to IndexUniverse data, with total assets topping $1 billion. [Emerging Market ETF Focuses on Consumers]
ECON is in the red for the year but has held up relatively better than the diversified emerging market ETFs.
The fund’s manager, Emerging Global Advisors, concentrates on developing economies. The firm’s latest offering, EGShares EM Dividend High Income ETF (NYSEArca: EMHD), was launched in mid-August. [New Dividend ETF for Emerging Markets]
ECON roughly splits its exposure to the consumer staples and consumer discretionary sectors.
The ETF lets emerging market investors position for a growing middle class and younger generation of consumers.
“ECON is an option for those seeking a portfolio of firms with direct exposure to the rapid growth in the consumption of goods and services in the emerging markets,” says Morningstar senior fund analyst Patricia Oey.
The fund tracks the Dow Jones Emerging Markets Consumer Titans 30 Index.
“As the developed world transitions from a society of spenders to a more prudent one of increased savings, the emerging world is slowly moving in the other direction,” said Richard C. Kang, chief investment officer at Emerging Global Advisors, in 2010 when the firm licensed the Dow Jones index. “Although individually the emerging market consumer may have a smaller amount to spend, because of the size and youth of this demographic they are able to compensate for the massive structural changes happening in the developed world. This ETF is the first emerging market fund paying attention to this trend.”
Given ECON’s concentrated exposure to large, well-established firms, the ETF’s tracking benchmark has been less volatile than the MSCI Emerging Markets Index and has delivered significantly better risk-adjusted returns over the past five years, according to Morningstar’s Oey.
“The investment thesis behind this fund 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,” the analyst wrote in a profile of ECON. “Other growth drivers include the rise of consumer credit, urbanization, and relatively young populations in a number of emerging markets. Personal incomes are growing rapidly as well.”
Full disclosure: Tom Lydon’s clients own ECON.