Emerging markets funds, both active and passive, are struggling this year, but investors can unlock opportunity with the right funds – those emphasizing growth stocks while avoiding lagging state-owned enterprises (SOEs).

Enter the KraneShares Emerging Markets Consumer Technology ETF (NYSEArca: KEMQ).

KEMQ tracks the Solactive Emerging Markets Consumer Technology Index. “The Index selects companies from 26 eligible countries within emerging markets whose primary business or businesses are internet retail, internet software/services, purchase, payment processing, or software for internet and E-Commerce transactions,” according to the fund’s fact sheet.

“Growth sectors proved to be more resilient and largely outperformed value sectors,” said KraneShares in a recent note. “The wide dispersion between sectors last quarter has reinforced our belief that investors should target growth-oriented sectors and limit exposure to the ‘blob’ of ‘old economy’ sectors when investing in Emerging Markets.”

Keeping up With KEMQ

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

KEMQ’s underlying index “specifically focuses on growth sectors within EM, comprised of companies whose primary business includes E-Commerce, online software services, mobile payment processing, and social media platforms,” according to KraneShares.

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.

“Beyond MSCI EM, many other EM indexes, such as minimum volatility, ESG, and Ex-SOE, still follow a similar, more broad-based sector breakdown, with large weightings toward financials and other value sectors,” notes KraneShares. “Each of these indexes performed worse than both the S&P 500 and KEMQ’s Index, which reinforces the idea that sector exposure is an important factor to consider when investing in EM.”

In the first quarter, KEMQ performed less poorly than the MSCI Emerging Markets Index and the average actively managed emerging markets fund.

In fashion superior to those rivals, KEMQ is levered to 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.

For more on tactical strategies, please visit our Tactical Investing Channel.

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.