(Editor's Note: This article first appeared in ETF Report magazine.)
Over the past decade, leading state-owned enterprises from the financial, energy and mining sectors paved the way for the advance in broad emerging market indexes. In the coming decade, a different set of companies focused on consumers are expected to be in the vanguard of the next wave of growth.
According to research firm McKinsey & Company, annual consumption from emerging markets will hit $30 trillion by 2025, up from $12 trillion in 2010, and the global "consuming class" will swell to 4.2 billion in the coming decade.
ETF issuers have caught on to this tremendous growth opportunity. There are now three broad emerging market ETFs that specifically target consumers, and several other ETFs that indirectly target the rising theme. For investors looking to get granular, there are a handful of single-country consumer-focused ETFs.
The existing emerging-consumer ETFs differ in many ways. Some target only cyclicals, while others target cyclicals and non-cyclicals, as well as other sectors relevant to emerging consumers. Some include countries like South Korea and Taiwan, which drastically change the composition of the fund.
All of this leads to differences in performance, valuations, risks and volatility between the ETFs, so it pays to dig deeper to find the right portfolio based on your investment objectives.
Broad Emerging-Consumer ETFs
The EGShares Emerging Markets Consumer ETF (ECON | C-28) is the leading emerging market consumer ETF. The fund now boasts more than $1.1 billion in assets, and trades more than $6 million daily.
ECON is a highly concentrated, cap-weighted portfolio of 30 companies from the consumer cyclical and non-cyclical sectors. However, because it tracks an index from S&P Dow Jones Indices, ECON excludes exporting powerhouses South Korea and Taiwan, significantly deviating in country breakdown from MSCI-based emerging market benchmarks.
In comparison, the WisdomTree Emerging Markets Consumer Growth ETF (EMCG | D-43) casts a wider net than ECON, holding roughly 200 securities stretching beyond the two consumer sectors and into telecom, financials, information technology and industrials.
EMCG differs significantly from ECON by following an "enhanced beta" approach, combining growth and valuation factors to select its holdings, then weighting them by annual income. This approach gives EMCG a value bias and a higher-than-average portfolio yield of 2.40%.