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Inside the New Emerging Market Consumer Growth ETF

Zacks Equity Research

WisdomTree, an ETF sponsor, added a new member to its fund family in the emerging market space. The latest entrant – WisdomTree Emerging Markets Consumer Growth Fund (EMCG) – will trade on the NASDAQ Stock Market.

This might raise a few eyebrows since emerging markets have been hit hard this year by domestic capacity constraints and falling currencies. But these under-valued markets can turn out as good bets over the long term, and especially so in the consumer space.

WisdomTree certainly seems to believe that there is plenty of pent-up demand in this highly promising, but currently beaten down, corner of the ETF world. Earlier this year, the asset management company filed for 3 Emerging Market ETFs, suggesting that EMCG may just be the beginning of the trend (read: WisdomTree Files for 3 Emerging Market ETFs).

EMCG in Focus

This new ETF looks to track the WisdomTree Emerging Markets Consumer Growth Index, which is designed to measure the performance of 250 stocks of the consumer sector and non-consumer sectors based on their combined ranking of growth, quality and valuation factors. The fund seeks to ride on the consumption growth in emerging territories (also read 3 Overlooked Emerging Market ETFs).

The securities are picked on the basis of earnings power. The index reflects considerable amount of diversification. At annual index rebalancing date, a single stock cap will be 5%, a country cap will be 25%, 60% allocation will be to specific consumer sectors and 40% allocation to other sectors.

The fund is a mix of consumer staples and discretionary stocks and will charge 63 basis points a year in expenses. While the product is governed by emerging markets with at least 60% focus, the U.S., Europe or Japan will have some exposure, but definitely not more than 25%.

How might it fit in a portfolio?

This ETF could be an interesting option for an emerging market play. Although emerging market ETFs have been lagging their developed counterparts this year and have been among the worst performing products, growth rates of these markets are still quite high when compared to many of the developed nations.

As per Euromonitor, emerging markets are expected to grow 5.5% in real GDP in 2013, more than twice the rate of developed markets. Also, the latest projection by IMF for developing nations’ growth is 6.2% by 2018 while for developed nations the same is as low as 2.5% (see all the broad Emerging Market ETFs here).

Notably, since 2010, 70% of growth in emerging markets came from consumer sector, as per WisdomTree Research. This segment also experienced very low volatility in the last few years.

Further, risks appear limited thanks to the favorable demographic trend. Overall, population growth is much higher in emerging countries than developed nations with younger population commanding the market.

On average, over 50% of the population is under 30. Also, the rate of urbanization is remarkably high – 10 times the developed economies, according to Euromonitor.

The burgeoning middle income population and increasing disposable income in emerging countries has enabled the residents to consume in greater numbers which in turn forced several foreign brands to shift their focus onto those nations.

The whole picture indicates that the underlying consumption growth story remains intact and promising for emerging markets despite some infrastructural bottlenecks at the current level (read Access the $30 trillion consumer market with these ETFs).

Other Competition

There are limited choices in the emerging markets space especially with a tilt toward broader consumer sector thereby leaving room for new funds to accumulate considerable AUM. Among these, the biggest competitor is likely to be the EGShares Emerging Markets Consumer ETF (ECON) tracking the Dow Jones Emerging Markets Consumer Titans 30 Index.

ECON has amassed $1.18 billion since its debut in September 2010. ECON charges comparatively higher expenses ratio of 0.85%. The fund holds 30 securities in the basket with a focus on Mexican and South African firms, each having around 19% share, thus entailing higher concentration risks.

Bottom Line

Emerging nations could offer nice entry points as their valuations are quite favorable at current levels. Pent-up demand and booming populations will drive the emerging markets’ growth ahead.

As for EMCG, a relatively favorable expense ratio and lower concentration risks in contrast to the peer group opens up an option for this newly launched fund to attract investors. Volatility could be high in the near term though, but the long term potential does seem to be immense for this growth-oriented product.

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Read the analyst report on EMCGRead the analyst report on ECONZacks Investment Research

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