Investors have heard plenty about the rise of the emerging markets consumers in recent, a theme easily accessed by a growing number of exchange traded funds.
Emerging markets investing, including doing so with ETFs, is changing, presenting investors with opportunities to take more tactical, thematic approaches to tap into the rise of developing world consumers. With many traditional emerging markets ETFs either too concentrated in the BRIC nations, excessively exposed to state-run enterprises or both, investors should rethink how they access emerging markets consumer trends.
While it can be tough to discern legitimate emerging markets opportunities at the moment, investors should not forget the emerging markets consumer and the EGShares Emerging Markets Consumer ETF (ECON).
While ECON includes many high-quality consumer brands, most of the fund’s components are domiciled in countries that are experiencing greater currency volatility, indicating the ETF has been vulnerable to the severe downturn in emerging currencies this year.
Still, some compelling data and commentary indicate it could be time for investors to revisit ETFs such as ECON.
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“The slowdown in emerging market consumer spending finally looks to have come to an end. On a three-month rolling average basis, retail sales grew by 5.5% y/y in April, the fastest pace since June 2015, and well above the lows reached in late 2015 when growth fell to below 5%. The national accounts data paint a similar picture, with consumer spending picking up in Q1,” according to a Capital Economics note posted by Dimitra DeFotis of Barron’s.
Traditional capitalization-weighted indices may overexpose investors to emerging market risks. For instance, the MSCI Emerging Markets Index includes a 24% tilt toward China, and over half of its country weights are concentrated in China, Korea and Taiwan. Additionally, financials, technology, energy and materials sectors account for 62% of the index.
“But just as prospects in the major commodity exporters may be starting to improve (or at least look less bad), the outlook for consumers in other EMs is becoming less positive … Another constraint on spending, at least in parts of Emerging Asia, will be high levels of debt. Households in a number of countries, including Thailand, Singapore, Malaysia and Korea have ramped up their borrowing aggressively in recent years,” adds Capital Economics in the note posted by Barron’s.
Last month, it was revealed that Emerging Global Advisors, the exchange trade funds issuer behind the EGShares family of ETFs, will be acquired by Columbia Threadneedle Investments.
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EGShares Emerging Markets Consumer ETF