Investors can access some of the fastest growth-oriented industries in the quickly expanding emerging markets through a targeted internet and e-commerce exchange traded fund.
The Emerging Markets Internet & Ecommerce ETF (NYSEArca: EMQQ) tries to reflect the performance of EMQQ The Emerging Markets Internet & Ecommerce Index.
EMQQ has outperformed the broader emerging markets so far this year. Year-to-date, the fund has jumped 14.7%, whereas the broader iShares MSCI Emerging Markets ETF (NYSEArca: EEM), which tracks the widely monitored MSCI Emerging Markets Index, has gained 9.1%. The emerging markets are also beating out U.S. markets, with the SPDR S&P 500 ETF (NYSEArca: SPY) only up 1.9% this year.
Kevin Carter, founder of EMQQ The Emerging Markets Internet & Ecommerce Index, argues that the strategy helps investors capitalize on growth in consumption across the developing markets, or what McKinsey & Co. calls “the biggest growth opportunity in the history of capitalism,” reports Trang Ho for Forbes.
With billions of people moving up toward the middle-class, the rising wealth among emerging economies will add to greater consumption. Additionally, with the widespread use of mobile broadband devices in a digital age, shifting consumption patterns reveal growth in e-commerce.
For instance, the Chinese e-commerce giant Alibaba (NasdaqGS: BABA) is EMQQ’s top holding at 8.0% of the ETF’s portfolio.
Carter also pointed out that EMQQ fills a void in broad emerging market investments that backs traditional benchmark indices. While many of these emerging internet companies may be listed on large U.S. benchmarks, major global indices and ETF providers have not included these companies on their own emerging market benchmarks.
“What’s not widely understood is that companies like Alibaba, and most of the other publicly traded emerging markets e-commerce companies, are not included in the major indexes and ETFs,” Carter said. “Here’s why: Most of the companies in the EMQQ Index have been backed by U.S. venture capital funds with U.S. institutional money.”
EMQQ will be reconstituted and rebalanced semi-annually in June and December, so the fund can add new IPOs that qualify under the benchmark’s liquidity and market-cap screens – the ETF only holds companies with over a $300 million market capiatlization that generate 50% or more of its revenue from internet or e-commerce activities in the emerging markets.
While the portfolio has a large China tilt, the ETF also includes some exposure to South Korea, South Africa, Russia, Argentina, Brazil and Taiwan.
Looking ahead, Carter believes that top line revenue growth will help the emerging-market strategy outperform U.S. markets.
“The S&P 500 had revenue growth of less than 5% in 2014,” Carter said. “The 40 plus companies in the EMQQ Index had revenue growth of 40%. That’s eight times as fast. The growth rate for e-commerce in emerging markets will certainly slow, but it should be several times as fast as the growth of revenue in the S&P 500 for a long, long time.”
For more information on the developing economies, visit our emerging markets category.
Max Chen contributed to this article.