Invest in Emerging Market ETFs to Gain from Tech Stock Boom

Emerging markets stocks and currencies have retained their momentum as the U.S. Federal Reserve has kept rates unchanged in the 0.25–0.50% band. Tepid inflation, muted business fixed investment and global growth issues compelled the Fed to hold off an interest rate hike decision for now. Most importantly, information technology stocks or popularly known as tech stocks, are actually driving the emerging market stock rally.

At present, tech stocks make up for the biggest chunk of the emerging-market equity benchmark. For the first time since 2008, tech stocks are enjoying a new level of prominence in the MSCI Emerging Markets index more than the S&P 500 index. Tech stocks are currently accounting for 23% of the MSCI Emerging Markets index compared with its previous high of 21.7% during the dotcom era of the 2000s. According to Jan Dehn, head of research at Ashmore Investment Management, seven of the ten largest stocks in the MSCI Emerging Market index are now tech companies.

Tech Stocks: Wil the Rally Continue?

Information technology is one of the very few industries that have witnessed massive technological improvement, even under recession. Unprecedented growth of high-speed mobile Internet traffic, particularly for wireless data and video has transformed this industry into the most evolving, inventive, and keenly contested space. Also, massive growth of high tech smartphones, tablets and other handheld devices have completely transformed the competitive landscape.

The tech savvy generation between the ages of 15 - 35, popularly known as “Millennials”, are the key drivers for the growth of Internet-based applications, e-commerce and mobile transaction related software. In addition to the presence of traditional semi-conductor and computer peripheral manufactures several companies are witnessing significant growth operating in the Internet and Internet-based software industries. Several countries are freeing up spectrums for wireless networks which are acting as a major boost for the growth of Internet-based businesses.

The millennials have a strong appetite for new technologies. As this group has the prospect of comprising 75% of the workforce by 2025, it surely emerges as a long-term investment bet. As per research by Global X, millennials now earn about $2 trillion, with income projected to grow to $8 trillion by 2025. (read: 5 Millennial Friendly ETF Investing Ideas). This trend will definitely boost tech-heavy industries of Taiwan, India, China and South Korea.

Why Emerging Market ETFs?

Of late, emerging markets have garnered a major position in the global investment arena. Low interest rates in the developed world, rising commodity prices and ongoing expectations of improving growth in developing economies have made emerging market ETFs attractive Investment choices.  

According to IMF data, emerging market & developing economies grew at 4% in 2015 and are expected to expand 4.1% in 2016 and 4.6% in 2017. These are higher than the global growth of 3.1% seen in 2015 as well as 3.1% and 3.7% expected for this year and the next, respectively. In comparison, the U.S. economy expanded 2.4% in 2015, will likely grow 2.2% this year and 2.5% in 2017 while the Euro zone’s growth rate was 1.7% in 2015. The common currency bloc will likely slow down to 1.6% this year and 1.4% in 2017. (read: 5 Reasons to Invest in Emerging Market Bond ETFs).

ETFs in Focus

Below we highlight a few emerging market ETFs which have strong focus on the technology sector.

iShares MSCI Emerging Markets ETF (EEM): This ETF replicates the price and yield performance of JP MORGAN GBI-EMG CORE INDEX.  The fund manages an asset size of nearly $31,862.6 million and an average daily trading volume of 70,805,966 shares. The fund charges an expense ratio of 69 basis points (bps) a year. EEM allocates 23% of its fund to the technology sector and 6% to the related telecommunications sector. The fund is up 19.3% so far this year (as of September 22, 2016).

iShares Core MSCI Emerging Markets ETF (IEMG): This fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the MSCI Emerging Markets Investable Market Index.  The fund manages assets worth $16,974.3 million and an average daily trading volume of 5,979,099 shares. IEMG allocates 22% of its fund to the technology sector and 5% to the related telecommunications sector. The fund charges an expense ratio of 16 bps a year. The fund has rallied 18.6% so far in 2016 (as of September 22, 2016).

iShares MSCI Emerging Markets Minimum Volatility ETF (EEMV): This ETF tracks the investment results of the MSCI Emerging Markets Minimum Volatility Index, composed of emerging market equities that, in the aggregate, have lower volatility characteristics relative to the broader emerging equity markets. The fund manages an asset size valued nearly $4,485.6 million and an average daily trading volume of 823,978 shares. EEMV allocates 17% of its fund to the technology sector and 11% to the related telecommunications sector. The fund charges an expense ratio of 25 bps a year. The fund is up 13.4% so far this year (as of September 22, 2016).

Vanguard FTSE Emerging Markets ETF (VWO): This ETF seeks to track the performance of The FTSE Emerging Markets All Cap China A Inclusion Index. The fund manages an asset size of almost $59,900.0 million and an average daily trading volume of 15,964,025 shares. The fund charges an expense ratio of 15 bps a year. VWO allocates 16% of its fund to the technology sector and 6% to the related telecommunications sector. The fund is up 19.1% so far this year (as of September 22, 2016).

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ISHARS-EMG MKT (EEM): ETF Research Reports
 
ISHARS-CR MS EM (IEMG): ETF Research Reports
 
ISHARS-MS EMMV (EEMV): ETF Research Reports
 
VANGD-FTSE EM (VWO): ETF Research Reports
 
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