Vogelzang: ECON, A Long-Term Play

December 16, 2013

As markets evolve, pockets of growth emerge.

This article is part of a regular series of thought-leadership pieces from some of the more influential ETF strategists in the money management industry. Today's article features Michael Vogelzang, president and chief investment officer of Boston-based Boston Advisors LLC.

Since bottoming out six months ago, emerging markets have rebounded nicely as investors recognized potential opportunity.

The iShares MSCI Emerging Markets ETF (EEM | B-100) returned 15.6 percent from June 24, 2013 to Nov. 30, 2013, slightly outperforming the SPDR S&P 500 ETF (SPY | A-98), which returned 15.2 percent over the same time frame.

Looking through a valuation lens, we find that emerging markets equities are currently cheap compared with those in the developed world. The table below highlights the point that at present, emerging markets are an attractive investment.

Earnings Yield Dividend Yield Book Value Yield Cash Flow Yield
MSCI Emerging Markets 8.2 2.6 66.5 13.1
MSCI Emerging Asia 7.9 2.3 61.0 12.8
MSCI Emerging Europe 15.8 3.4 136.2 24.7
MSCI Europe 6.0 3.3 54.9 11.3
MSCI U.S. 5.5 2.0 37.6 8.7

Sources: MSCI, Ned Davis Research

But much more than just a short-term story, we increasingly like the long-term prospects of emerging markets. The Conference Board projects that from 2014-2019, the GDP growth rate of developed countries will be 1.9 percent, while over that same period, it will be 4.3 percent.

From 2020-2025, the board projects the GDP growth rate of developed countries will be 1.4 percent and that it will be 3.2 percent for emerging countries. So while the rate of growth is projected to slow more in emerging nations than developed, the actual rate of growth in emerging markets is projected to remain higher.

Why Consider ECON?

This is where the EGShares Emerging Markets Consumer ETF (ECON | D-49) fits. Seeing an end to the commodities-led boom of the BRICs over the last few decades, we think it would be wise to expand emerging market exposure to markets beyond the BRICs.

We view ECON as attractive in terms of its future potential return and the diversification benefits it provides, both with exposure to the BRIC nations as well as to other developing economies.

These charts highlight the top country weights in the fund and the breakout of Industry Classification Benchmark sector weights:

 

 

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