Going Shopping With An Emerging Markets Consumer ETF

During the halcyon days for emerging markets equities, investors heard quite a bit about the consumer and related investment fare being the next frontier for developing world growth. The emerging markets consumer could eventually prove to be a legitimate investment catalyst, but that has not been the case this year.

The MSCI Emerging Markets Index, one of the most widely followed gauge of developing world equities, is lower by 13.6 percent this year, but some exchange traded funds focusing on the emerging markets consumer have fared worse.

Still, some investors are being lured to emerging markets ETFs on the back of compelling valuations. Throughout much of this now multi-year emerging markets slump, investors keep hearing how inexpensive developing world equities are. However, what appear to be compelling valuations have not been enough to lure investors back to this asset class.

However, developing world valuations are depressed, in part, because earnings growth is also depressed. That means investors should focus on those markets displaying decent earnings growth. The WisdomTree Emerging Markets Consumer Growth Fund EMCG is a potential solution.

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“Throughout this recessionary period in EM earnings, only four of the 10 sectors experienced positive earnings growth. Upon dissecting earnings at the sector level, we observed that old economy sectors in EM, namely Materials, Energy and Industrials, have experienced the most significant deterioration in earnings. One common thread among these sectors is their heavy reliance on commodity prices, which is in turn partly driven by global growth concerns,” said WisdomTree in a recent note.

EMCG, which tracks the WisdomTree Emerging Markets Consumer Growth Index (WTEMCG), holds consumer sectors and groups with exposure to the emerging markets consumer. For example, discretionary and staples stocks combine for nearly 60 percent of the ETF's weight while financial services and technology names combine for 27.5 percent.

Investors should keep in mind that there is always a difference between "value" and "value trap" and that is apparent in emerging markets. After all, anemic earnings growth has been a primary catalyst in driving developing world equity valuations lower.

Data indicate emerging markets consumer stocks are experiencing less bad earnings contraction than other sectors.

“While the MSCI Emerging Markets Index has experienced an earnings contraction of almost 23%, WTEMCG saw its earnings contract by only 1.5%. The ability to maintain its earnings growth while the MSCI EM Index experienced a large contraction in earnings is testimony to the strength of the consumer-related sectors in the EM block,” according to WisdomTree.

China, Brazil and South Korea combine for over 59 percent of EMCG's weight, indicating that any rebound in Brazilian coupled with positive economic data out of China should bolster the ETF's near-term prospects.