A Popular Emerging Markets Theme Rises Again

Several years ago, during the go-go days of emerging markets investing, investors heard a lot about developing world consumers, the related opportunity set and investments with which to tap into that theme. Predictably, exchange-traded funds issuers rose to that occasion.

With emerging markets on the move higher this year, investors may want to renew evaluation of the consumer theme. That could be a rewarding move at a time when emerging markets earnings growth is still slack. The WisdomTree Emerging Markets Consumer Growth Fund (WisdomTree Trust EMCG) is a potential solution.

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 62 percent of the ETF's weight, while financial services and technology names combine for 26 percent.

Related Link: This Emerging Markets Dividend ETF Rides Again

Obviously, an ETF such as EMCG is likely to have large weights to consumer staples and discretionary stocks, but another part of the ETF's story is what it excludes.

Digging Deeper Into EMCG

“Banks greater than $10 billion in market capitalization and Energy and Materials firms are not eligible” for inclusion in EMCG's underlying, according to a recent WisdomTree note.

It is hard to argue with EMCG's results, at least this year. Year-to-date, the ETF is outpacing the MSCI Emerging Markets Index by 220 basis points.

By excluding banks with market caps north of $10 billion along with energy and materials stocks, EMCG significantly reduces exposure to state-owned enterprises. That is a point in the ETF's favor, particularly if commodities prices tumble or global investors again become skittish about the strength of China's banking system.

Performance And P/E Ratio

“What we find more remarkable, however, is that the WisdomTree Index delivered this performance and retained a P/E ratio very similar to broader emerging markets. The Dow Jones index, on the other hand, had a P/E ratio almost twice that of broader emerging markets. Remember, a high valuation today makes for a higher hurdle for future returns,” noted WisdomTree.

Brazil, Latin America's largest economy, and China, the world's second-largest economy, combine for 45.4 percent of EMCG's weight. South Korea, Asia's fourth-largest economy, is EMCG's third-largest geographic allocation at 15.6 percent. Overall, EMCG features exposure to 15 countries.

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