Tech's Rise Good For EM ETFs; Here's A Better Idea

Some of the most often cited criticisms of traditional emerging markets equity indexes include heavy exposure to financial services stocks and to state-owned enterprises (SOEs) hailing from the energy and materials sectors.

Criticism

A derivative criticism is that these indexes are not or have not previously been adequately allocated to the real growth engines of emerging economies, such as technology and consumer sectors. That is starting to change. Look at the widely followed MSCI Emerging Markets Index, which now allocates over 23.2 percent of its weight to tech stocks, good for second place, 300 basis points behind financial services.

Positives In Progress

Five of the top 10 holdings in the MSCI Emerging Markets Index, to which over $1.5 trillion in global assets are benchmarked, are technology or internet stocks. That group familiar U.S.-listed fare such as Taiwan Semiconductor Mfg. Co. Ltd. (ADR) TSM, Alibaba Group Holding Ltd. BABA and Baidu Inc (ADR) BIDU.

Related Link: It's Not Easy Being A New ETF

It has been a long time coming for standard emerging markets indexes to reflect the growing importance of technology and internet stocks on developing economies, but investors did not have to wait thanks to Emerging Markets Internet and Ecommerce ETF (The) EMQQ.

Success With EMQQ

While it is nice traditional emerging markets indexes now have larger weights to tech and internet names, waiting for that scenario to arrive meant leaving a lot of money on the table. Over the past year, EMQQ is up 35 percent, more than double the 13.6 percent returned by the MSCI Emerging Markets Index over the same period.

MSCI EM's weight to tech is “higher than 21 percent in 1999. That indicates that the developing-nation measure is shedding its dependence on industries with lower profitability and shifting to ones with higher returns-on-equity, Morgan Stanley strategists wrote in a note,” according to Bloomberg.

Bloomberg reports that Morgan Stanley also noted that “for the first time in at least 15 years, the combined weight of energy, commodities and industrial groups has fallen below that of technology shares.”

Energy, materials and industrial names currently combine for about 20 percent of the MSCI Emerging Markets Index. Of course, EMQQ has no exposure at all to those sectors. A look at the weights of individual holdings underscores why EMQQ's time as more than a satellite holding could be now.

The Chinese Factor

Sure, it is nice that Chinese internet giants Tencent Holdings TCEHY TCTZF TCEHY and Alibaba combine for nearly 6 percent of the MSCI Index's weight, but EMQQ devotes a combined 17 percent of its weight to those stocks.

Considering that Baidu is often called the “Google of China,” its 1.1 percent weight in MSCI EM is arguably paltry. The nearly six percent Baidu gets in EMQQ is probably more reflective of the stock's significance to emerging markets and Internet investors.

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