In one of our latest articles dedicated to China’s slowing economic growth [China Should Focus on Reforms and Cut Its Economic Growth Target to 7% – World Bank] we briefly touched the consumer subject. China, during the forthcoming years, is supposed to redirect its economy by stimulating its domestic demand, as the current levels of manufacturing wages are simply not competitive against some of the Emerging Asia countries.
Similar economic rules apply also to the other developing nations. For example, population growth in the emerging markets is a significant driver of economic growth. With that growth comes an increasing middle-class of consumers which has the same aspirations, desires and needs as their counterparts in the developed countries. That middle class wants to enjoy the latest cars, gadgets, luxuries, etc. It is worth noting that in less than 20 years, GDP per capita growth in China and India should double. That is a much quicker pace than the 50 years it took the U.S. to achieve the same, not to mention the 150 years it took in Britain.
The fund we are going to scrutinize here is the EGShares Emerging Markets Consumer ETF (ECON). It seeks investment results that correspond (before fees and expenses) to the price and yield performance of the Dow Jones Emerging Markets Consumer Titans 30 Index. The underlying index, which the fund replicates, measures the stock performance of 30 leading emerging market companies in the Consumer Goods and Consumer Services Industries as defined by Dow Jones Indexes.
Investors seeking exposure to the emerging market consumer theme should consider the following three fundamental reasons to buy the ECON:
- Forward-looking growth potential: Consumer sectors may stand to benefit as many emerging economies transition from an export-led growth model to one focused on domestic spending.
- Favorable demographic trends: Fueled by a growing labor force and rising middle class, annual consumption in developing markets is expected to more than double by 2025 to $30 trillion (Source: McKinsey & Company, “Winning the $30 trillion decathlon,” August 2012)
- Targeted exposure to the Emerging Markets (EM) consumer: The ECON offers exposure to the largest consumer goods and consumer services companies domiciled in developing markets. These companies derive most of their revenues from EM sales, providing truer access to the EM consumer theme.
A very quick analysis of the ETF’s geographic exposure finds out it allocates almost 52% to three countries: South Africa, China and Mexico. On the sector level the portfolio allocates almost equally between consumer goods and services.
Courtesy of EGShares
The ECON’s top holding (10%) is Naspers Ltd. which is a global platform operator with principal operations in internet services, especially ecommerce; pay television and print media. Top 10 holdings of the ETF comprise 53% of the portfolio.
Courtesy of EGShares
Based on the 3-year portfolio performance analysis relative to the MSCI EM Index, the fund generates alpha as well as is less risky than the reference benchmark with the beta of 0.85.
During the past three years, the ECON outpeformed the iShares MSCI Emerging Markets ETF (EEM) by around 12.3%. The closer analysis of the three years shows the ECON vs. EEM ratio had been in a bullish mode between November 2011 and July 2013. Since then the ratio has been trading in a generic bearish tunnel, however much less steeper than the preceding bullish run. As a reminder, a rising price ratio means the numerator/ECON is outpeforming (up more / down less) the denominator/EEM.
Courtesy of StockCharts
The ECON was launched on the 14th September 2010. It is a very liquid product with $1,282m AUM as of October, 29th this year. The ETF distributes dividends to investors annually at the level of around 0.74%. The ETF can be purchased at the cost of 0.84% expense ratio.
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