ETFs target emerging markets
Funds focusing on consumers in developing nations may be among the key investments 'of our lifetime.'
By Don Dion, TheStreet
Evidence of the developing world's popularity can be seen in November's flow data compiled by the Nation Stock Exchange. During the month, the Vanguard Emerging Market ETF (VWO) scored the No. 1 position among all exchange-traded products, pulling in $1.7 billion.
This week, Jim O'Neill, the man responsible for making the BRIC acronym a household word within the investing world, offered a promising forecast for this quartet and other emerging markets. In an interview with Bloomberg, O'Neill fingered emerging-market consumers as a key investment "of our lifetime."
In order to invest in this optimistic projection, O'Neill suggests gaining exposure to either large Western multinationals or consumer-based companies in the developing world. Using ETFs, it is possible to take advantage of both options.
Exposure to large Western multinationals can be achieved with a number of U.S. equity funds. For instance, the Consumer Staples Select Sector SPDR Fund (XLP) provides investors access to a number of firms with a strong footing in the developing world, including Coca-Cola (KO) and Procter & Gamble (PG).
Because of the size and stability of these companies, XLP and other U.S. equity products may be the safest way for conservative investors to benefit from the growing impact of the emerging-market consumer.
Aggressive investors, however, may find the second option, accessing consumer-focused companies based in emerging markets, more to their liking. Gaining access to this slice of the global economy, however, can be tricky.
In the past, investing in popular emerging markets such as Brazil and China required taking on exposure to funds such as iShares MSCI Brazil Index Fund (EWZ) or the iShares FTSE/Xinhua China 25 Index Fund (FXI). While the indexes underlying these funds are designed to provide investors with exposure to all reaches of their respective markets, often they come up short when it comes to capturing the influence of the nations' domestic consumer.
For instance, in the case of both EWZ and FXI, large, multinational or state owned enterprises in the financial and energy sectors take up the lion's share of their assets. Meanwhile, consumer-focused sectors are pushed to the sidelines, representing only minor slices of their overall portfolios. In EWZ, consumer discretionary and consumer staples together account for 14% of the fund's total index. Meanwhile, in FXI, consumer services represent only 2% of the fund.
Thankfully, however, as the ETF industry has expanded, the number of emerging-market options has taken off and investors looking for exposure abroad are no longer tied down to products such as EWZ and FXI.
Using funds offered by companies such as Global X, Guggenheim and Market Vectors, aggressive investors can now tap into the hottest aspects of many of these sought-after nations such as their consumer sector.
Small-cap emerging-market funds such as Guggenheim China Small Cap ETF (HAO) and Market Vectors Brazil Small Cap ETF (BRF) have traditionally been my favorite products for investors looking to tap into the domestic populations of popular emerging markets.
Both HAO and BRF set aside large percentages of their portfolios to the consumer, totaling 23% and 32%, respectively. The popularity of these funds has lead to the launch of other small-cap emerging-market products, such as the Market Vectors India Small Cap Index ETF (SCIF).
The emerging-market consumer will certainly be an important economic component to watch as we head into 2011 and beyond. With products such as XLP, BRF and HAO, investors can allocate their portfolios to coincide with their individual risk tolerance.
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John Stumpf acknowledges that growth has been slow, but he says he's still optimistic.
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