Roughly 85% of the global population lives in emerging markets such as Brazil, South Korea, and India. When you combine these numbers with the rise in internet connectivity and e-commerce, it creates a compelling investment thesis.

Speaking with Arianne Alcorta on ETFguide TV, EMQQ founder & CIO Kevin Carter explains why emerging and frontier markets are poised for major growth. Ultimately, it boils down to three megatrends he’s seeing in emerging and frontier markets. And the “first and biggest part of the story” is “the rise of the emerging markets consumer.”

“They want stuff,” Carter explains. “They want more and better food, more meat, they want an extra pair of shoes and second coat. “They want a heater and appliances, they want to take a vacation, they want a car, they want their kids to go to college.”

The second megatrend coming out of emerging and frontier markets is the computer. “The rest of the world is just now getting their first computer,” Carter said. But unlike the U.S., consumers’ first computers in emerging markets are “not on their desk and … never will be,” but in their pockets.

Which leads to the third megatrend: the internet. As consumers in nations like Brazil and South Korea are getting their first computers in the form of a smartphone, they’re also getting online for the first time. And according to Carter, “because the consumption infrastructure in emerging markets is undeveloped,” meaning, “nobody has a bank account with a debit card, nobody has a cable TV on the wall, and there’s no Target store to drive to even if you had a car … these people are leapfrogging traditional consumption, and in many ways are more digital than we are.”

Carter notes that emerging markets are doing better this year than the S&P 500, but the problem is that the MSCI Emerging Markets Index isn’t representing that growth, because he feels it is “a flawed index and it’s got some serious problems.”

“There’s been a ton of growth in emerging markets, but If you look at the 15 year return of the emerging markets ETFs, it’s basically zero,” Carter says, explaining that the reason why is because the MSCI EM Index is “full of legacy economy companies and primarily state owned enterprises; government-owned banks and oil companies, which are inefficient and not designed to build shareholder value in a traditional sense and the corruption is rampant.”

Carter adds that these government-owned companies make up about a third of these emerging markets indexes. “So, you got to leave the old legacy indexes behind and try to capture the real growth.”

The video is available both on YouTube and the NYSE’s ETF page.

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