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A Credible Alternative To Standard Emerging Market ETFs

ETF Professor

Emerging markets stocks and exchange traded funds are bouncing back this year. The widely followed MSCI Emerging Markets Index is higher by nearly 8 percent.

While performances by traditional emerging markets funds have been solid to start 2019, investors may want to consider more unique approaches to developing economies to potentially capture more upside.

What Happened

Widely touted as a future driver of emerging markets economic and equity market growth, the consumer theme is starting to come alive. An avenue for accessing that theme is the KraneShares Emerging Markets Consumer Technology ETF (NYSE: KEMQ). KEMQ, which debuted in October 2017, follows the Solactive Emerging Markets Consumer Technology Index.

That 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 KraneShares.

Why It's Important

KEMQ isn't just participating in this year's emerging markets rally. The ETF is taking on a leadership role with a year-to-date gain of 12.39 percent. KEMQ offers a broad emerging markets view on many of the themes the KraneShares CSI China Internet ETF (NYSE: KWEB) delivers for investors focusing on China.

Those themes include e-commerce and online shopping, increased Internet penetration and rising domestic consumption in developing economies.

“We believe the greatest potential growth in EM could come from emerging market consumer technology,” said KraneShares in a recent note. “Two critical catalysts for this trend are rising urbanization and middle-class consumption. When people move from rural areas into cities, their standard of living and income generally rise. This is occurring rapidly in emerging markets where, over the past 15 years, the total population living in urban areas has increased by more than 400 million people and average GDP per capita has more than doubled.”

KEMQ holds almost 50 stocks, over 89 percent of which are communication services or consumer discretionary names. Over a dozen countries are represented in the ETF, but China and South Korea combine for nearly 61 percent of the fund's geographic exposure.

What's Next

While emerging markets have seen significant technological expansion in recent years, that's likely still in its early innings, which bodes well for KEMQ's long-term prospects.

“While the proliferation of emerging market consumer technology has been significant in recent years, we believe this growth trend could continue over the next decade,” said KraneShares. “The McKinsey Global Institute estimates that consumers living in emerging market cities will contribute 56% of global consumption growth from 2015-2030.”

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