While researching for a recent article, I came across a banner ad for a recently introduced ETF with an interesting proposition. The EGShares Emerging Markets Consumer ETF
The state of things
To get a sense of context, you have to first look at other emerging markets ETFs. Most of them are basically the same, tracking the MSCI Emerging Markets Index and differing only in their tracking error and management fees. One of the oldest and most popular of these is the iShares MSCI Emerging Markets Index Fund. Like most market capitalization-weighted indexes these days, financials are the most represented sector, making up 23% of the fund. Meanwhile, energy and materials stocks make up a combined 28% of the fund.
The emerging middle class -- the core of almost every emerging markets thesis -- will surely consume more raw materials and need more sophisticated banking. But it is ridiculous to think that half of the growth out of emerging markets is going to come from things like banking, steel mining, and oil drilling. The iShares fund only has about 16% invested in consumer discretionary and consumer staples stocks. As these consumers get richer, they will surely spend more on higher-quality food and clothing than on banking.
Furthermore, the top stocks in the index are unlikely to generate much growth. South Korea and Taiwan come in second and fourth place for country representation, respectively, but they are far more developed than India (sixth) or Mexico (eighth), and thus aren't likely to have as much rapid growth ahead of them.
Further clouding the usefulness of the index is that some of the top holdings are companies heavily subsidized or even owned and controlled by the government, like China Mobile
Zeroing in on the action
The EGShares fund is different. It tracks the Dow Jones Emerging Markets Consumer Titans Index, which is still market-cap-weighted, so it's still biased toward large companies. But because it's only 30 stocks, even the smallest holding is fairly significant. Here's a sampling of the holdings with their industries and weightings.
New Oriental Education Technology Group
|Naspers Limited||South Africa||Media||5.0%|
Source: Emerging Global Advisors.
You aren't likely to have heard of many of them, and that's a good thing. Emerging markets consumers tend to be less aware of global companies and have more brand loyalty toward local ones.
But there is something to be said for the use of international brands as status symbols, and not all of these companies exclusively produce local brands the rest of the world has never heard of. Astra International, for instance, holds the exclusive Indonesian distribution rights to automotive brands such as Toyota and BMW. Ambev sells its own portfolio of local South American beers, but also sells the well-known brands of its parent company Anheuser-Busch InBev.
You'll also notice that not all of these companies are selling tangible products. New Oriental offers English language training and prep courses for tests like the SAT and GRE, a vital service in a country like China where education is highly valued and highly competitive.
The Foolish bottom line
It's no wonder that many of the companies in this fund are also active recommendations from various Fool services. These are companies that stand to directly benefit from a growing middle class in emerging markets, and now there's a way to access them without also having to make a huge bet on commodities or murky financial companies.