Quiet Rally for EM Consumer ETF

ETF Trends

In what is proving to be a good year for emerging markets stocks and exchange traded funds, funds targeting consumers in the developing world are delivering on the promise of growth.

Year-to-date, the Vanguard FTSE Emerging Markets ETF (VWO) and the iShares MSCI Emerging Markets ETF (EEM) , the two largest emerging markets ETFs by assets, are up an average of 10.8%. However, EEM’s combined allocation to consumer-related sectors is just 17%, meaning an ETF such as the EGShares Emerging Markets Consumer ETF (ECON) can serve as a useful complement to more traditional emerging markets funds. [Getting Selective With Emerging Markets]

ECON is up nearly 10% this year and is one of 30 ETFs (at this writing) to have made a new all-time high Tuesday. While this year’s emerging markets rally has been impressive, ECON’s performance is arguably more noteworthy when considering the pockets of consumer weakness throughout the developing world.

For example, ECON’s largest country weight is almost 20% to South Africa. Not only is South Africa no longer Africa’s largest economy, but the resource-rich country is plagued by unemployment that, by some estimates, hovers north of 20%. Additionally, the economy there has been hindered this year by labor strikes at platinum and palladium mines. [South Africa ETF Endures Macro Woes]

Despite all that, the iShares MSCI South Africa ETF (EZA) is up nearly 13% this year and is currently flirting with 52-week highs. EZA allocates 24% of its weight to the consumer discretionary sector. Strength in some of EZA’s discretionary holdings has clearly trickled down to ECON. Both ETFs feature South African media giant Nasapers as their largest holding.

ECON has also managed to with Brazil’s interest rates, which are among the highest in the developing world and seen as punitive to consumers there. Financial markets apparently view the Brazilian consumer through a more positive lens because the Global X Brazil Consumer ETF (BRAQ) is up 17% this year. That is good for ECON, an ETF that devotes 15% of its weight to Latin America’s largest economy. [Brazil ETF Rallies as Rousseff Slumps]

Predictably, China plays a pivotal role in charting ECON’s course. The country is the ETF’s second-largest country weigh at 16.3%. That has been advantage even as some Chinese consumer-related shares have disappointed this year.

“The Chinese consumer market has grown to now 27 percent the size of the U.S. market, up from 8 percent in 2001. In just 2012 alone, China’s private consumption grew by $400 billion. Additionally, China’s wages have tripled in the last decade,” according to Reed Walters of Sector Capital Management.

The knock on emerging markets consumer stocks is valuation. The S&P 500 trades around 16.7 times forward earnings while the MSCI Emerging Markets Index is far less expensive at 10.7 times earnings. ECON’s trailing P/E ratio is nearly 24, according to EGShares data.

EGShares Emerging Markets Consumer ETF

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Tom Lydon’s clients own shares of ECON.

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