This ETF's Exclusionary Tactics Could Pay Off for Investors | ETF Trends

Investors holding broad-based emerging markets exchange traded funds endured rough times in 2021, mostly due to China.

It’s possible that this scenario repeats again in 2022, underscoring the viability of strategies such as the Next Frontier Internet & Ecommerce ETF (FMQQ). FMQQ is an ideal way for investors to access emerging markets while eschewing China exposure — a recipe that some market observers believe can be successful going forward.

“We continue to favor emerging market ex-China exposure. EM economies have long-term structural advantages and EM equities have performed well in past hiking cycles,” according to Bank of America research.

While China’s e-commerce investment thesis remains valid, it’s also under considerable duress owing to last year’s regulatory crackdown. Add to that, some market observers believe that it will be a while before Beijing relents on this front.

However, there are myriad other compelling e-commerce opportunities in other developing economies, a theme that FMQQ taps into. For example, India offers investors favorable demographics, a tech-savvy population, and ample room for internet penetration to grow. Asia’s third-largest economy is FMQQ’s third-largest geographic exposure at 12.7%.

FMQQ also allocates a combined 36.5% of its weight to South Korea and Singapore, which is relevant because those are high-quality, lower volatility markets.

Helen Qiao also expects EM Asian central banks to be more dovish than DM peers while China’s property market remains in a downtrend, bolstering the case for EM ex-China exposure,” adds Bank of America.

Overall, FMQQ features exposure to 18 countries, but South Korea, Brazil, and India combine for 53% of the fund’s geographic exposure, according to issuer data. Brazil, FMQQ’s second-largest country weight, offers many of the same traits as India, including favorable demographics and a big runway for more internet penetration. Plus, some market observers believe that equities in Latin America’s biggest economy are attractively valued, though a case can be made that this is true of the emerging markets complex at large.

“Emerging Market equity valuations are the lowest in our International Equity ETF coverage. The average EM equity ETF is trading -0.51 standard deviations from average valuations, driven primarily by low P/E and P/FCF multiples,” concludes Bank of America.

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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.