An EM ETF to Capitalize on the Future of Consumption in a Digital Age

The rising digital consumer wave in emerging markets has opened many new opportunities, and investors can look to a targeted exchange traded fund strategy that captures companies best positioned to benefit from these permanent shifts in consumer behavior.

In the recent webcast, The Future of Emerging Markets & The Accelerating Digital Revolution, Kevin Carter, Founder and CEO, EMQQ, underscored the favorable demographics that continue to support consumption-based growth in the emerging markets. Specifically, 85% of the global population resides in developing economies, which are expected to account for over 50% of global GDP. Additionally, emerging markets and frontier markets have some of the youngest demographics, with about 8.8 times the number of those under the age of 30, compared to developed economies.

Looking ahead, middle-income consumers will take on a greater role in the emerging and developing economies. According to McKinsey & Co. projections, there will be an expected 4.2 billion people among the consuming class by 2025, and the emerging markets will make up $30 trillion in consumption while developed markets will make up $34 trillion. In contrast, emerging market consumers accounted for $12 trillion in world consumption back in 2010.

Despite this growth story, U.S. investors are largely under-allocated to the developing markets. Furthermore, investors who have exposure to the emerging markets primarily tilt toward state-owned enterprises, which are owned and controlled by the government. These so-called SOEs are large, inefficient, have poor corporate governance, and may show widespread corruption. Among the largest or most popularly traded emerging market ETFs, 30% of their underlying holdings are allocated to SOEs.

Alternatively, Carter highlighted the potential opportunity to capture the growth of a rising middle-income consumer class in the emerging markets, notably the growing reliance on smartphones as a major catalyst in changing consumption patterns. He pointed toward the rising trend of e-commerce and online shopping through smart devices in an increasingly digital age. The rise of e-commerce has also paralleled the increased adoption of smartphone usage or the declining costs of smartphone devices.

The rising usage of mobile devices has also fueled rapid growth in mobile payments for online transactions. For example, in China, the total online transactional value in mobile payments made up $25.9 trillion in 2018, compared to $15.4 trillion in 2017, $9.2 trillion in 2016, and $1.9 trillion in 2015.

Carter also pointed out that the adoption of smart devices and internet penetration among developing economies remain in the early phases, so there is still a lot of room to grow as more consumers gain access to online retailers. For example, while 79.1% of U.S. citizens have access to smartphones, Chinese smartphone users make up about 59.9% of its overall population, and India’s smartphone users only make up 25.3% of its population.

While the coronavirus or COVID-19 has pummeled the global economy, Carter argued that internet and e-commerce based business models are receiving a slight boost, notably from a surge in demand for widely adapted e-commerce businesses. The shift in day-to-day habits from lockdown measures to contain the pandemic has accelerated the adaption of certain platforms, such as distance learning, telemedicine, and food delivery, among others.

As investors look for ways to capture growth in the emerging markets, some may look to a targeted consumer-sector EM play, such as the Emerging Markets Internet & Ecommerce ETF (NYSEArca: EMQQ), which includes access to EM companies related to online retailers or the quickly expanding e-commerce industry. To be included within the ETF’s underlying index, companies must derive the majority of their profits from E-commerce or Internet activities and further includes search engines, online retail, social networking, online video, e-payments, online gaming, and online travel.

Financial advisors who are interested in learning more about investing in emerging markets and the digital revolution can watch the webcast here on demand.