ETFs to Capture the Digital Consumer Growth Story in the Emerging Markets

Investors can utilize an exchange traded fund strategy to capitalize on the digital growth opportunity in emerging markets’ internet and e-commerce sectors.

In the recent webcast, Emerging Markets Tech – The Next Wave of the Digital Revolution, Kevin T. Carter, founder and CIO of EMQQ Global, underscored the emerging opportunity in developing economies, such as their favorable demographics that continue to support consumption-based growth and the fact that 85% of the global population resides in developing countries. Emerging markets and frontier markets are also home to some of the youngest demographics, with about 8.8 times the number of those under the age of 30 compared to developed economies.

Supporting the growth outlook, middle-income consumers could take on a more significant role in the global economy ahead, especially in emerging countries where younger demographics thrive, Carter added. According to McKinsey & Co.’s projections, an expected 4.2 billion people will constitute the consuming class by 2025. The emerging markets could account for $30 trillion in consumption, with developed markets making up $34 trillion. In comparison, emerging market consumers only generated $12 trillion in world consumption in 2010.

Investors have used popular broad emerging market funds to track widely observed benchmarks like the MSCI Emerging Market Index. However, these traditional EM funds are overexposed to state-owned enterprises owned and controlled by the government. Carter warned that these so-called SOEs are large, inefficient, have poor corporate governance, and may show widespread corruption. Among the largest or most popularly traded emerging market ETFs, 30% of underlying holdings are allocated to SOEs.

Looking ahead, Carter argues that investors should consider the growth of consumers or increased consumption trends in developing economies. Specifically, ongoing trends like the growing reliance on smartphones are a significant catalyst in changing global consumption patterns. The rise of e-commerce has also paralleled the increased adoption of smartphone usage and the declining cost of the devices themselves.

In addition, developing economies’ adoption of smart devices and deepening internet penetration remain in the early phases. There is still plenty of room to run. For example, while 82% of U.S. citizens have access to smartphones, Chinese smartphone users make up about 63% of its overall population, and India’s smartphone users only constitute 32% of its population.

As a better alternative to traditional emerging market index funds, Carter highlighted the Emerging Markets Internet & Ecommerce ETF (NYSEArca: EMQQ), which includes access to EM companies related to online retailers and the quickly expanding e-commerce industry. To be included within the ETF’s underlying index, companies must derive most of their profits from e-commerce or internet activities like search engines, online retail, social networking, online video, e-payments, online gaming, and online travel.

However, Carter added that EMQQ has primarily been a China story as China makes up over 50% of EMQQ’s underlying portfolio, which doesn’t come as a surprise since China’s e-commerce sales are four times larger than all other emerging markets countries combined.

However, this does not mean that investors should ignore the next frontier of consumer markets. Like many frontiers, developing economies see a slew of new e-commerce or retail internet companies coming online.

Alternatively, investors can consider the Next Frontier Internet & Ecommerce ETF (FMQQ) to capture these favorable trends in frontier markets. Strong economic growth, attractive relative valuations, and a concentration on consumer and internet names — the most attractive sectors — could be an excellent opportunity for investors for a more targeted approach to these frontier economies. Carter also notes that the next frontier population is four times larger than China, providing an extensive consumer base to support a growing internet and e-commerce industry. The next frontier also offers a greater consumer growth story with only about 5% e-commerce penetration among FMQQ’s underlying countries.

Lastly, investors can focus on the vast consumer base in India through the recently launched India Internet and Ecommerce ETF (NYSE Arca: INQQ), which follows the India Internet and Ecommerce Index and holds about 20 stocks. The rookie ETF could be an ideal way to capitalize on India’s favorable demographic trends.

Carter noted that India is projected to have the world’s largest population in the next couple of years. India’s generation-z, or younger demographic, population is greater than that of China and the U.S. combined. India is also the fastest-growing major economy, with the International Monetary Fund projecting a GDP growth rate of 8.2% over 2022, compared to 4.4% for China and 3.7% for the U.S. The IMF is even estimating India to become the third-largest global economy by the next decade.

Fueling this expected growth in India, the swelling middle-income household will have greater discretionary spending power. The middle-income household is expected to make up 78% of India by 2030, compared to 54% in 2018.

Financial advisors who are interested in learning more about the emerging digital growth opportunity can watch the webcast here on demand