ETFs to capture the digital consumer growth story in emerging markets

IInvestors can use an exchange-traded fund strategy to capitalize on the digital growth opportunity in the emerging market internet and e-commerce sectors.

During the recent webcast, Emerging Markets Technology – The Next Wave of the Digital Revolution, Kevin T. Carter, Founder and CIO of EMQQ Global, highlighted emerging opportunities in developing economies, such as their favorable demographics that continue to support consumption-based growth and the fact that 85% of the world’s population resides in developing countries. Emerging and frontier markets are also home to some of the youngest populations, with about 8.8 times the number of people under 30 compared to developed economies.

Supporting growth prospects, middle-income consumers could play a bigger role in the coming global economy, especially in emerging countries where young people are thriving, Carter added. According to McKinsey & Co. projections, 4.2 billion people are expected to make up the consumer class by 2025. Emerging markets could account for $30 trillion in consumption, with developed markets accounting for $34 trillion. By comparison, consumers in emerging markets only generated $12 trillion in global consumption in 2010.

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

Looking ahead, Carter argues, investors should consider consumer growth or increased consumer trends in developing economies. Specifically, current trends such as the growing addiction to smartphones are an important catalyst for changing global consumption patterns. The rise of e-commerce has also been accompanied by the increased adoption of smartphone usage and the falling cost of the devices themselves.

Furthermore, the adoption of smart devices by developing economies and the deepening of internet penetration are still in their infancy. There is still plenty of room to run. For example, while 82% of US citizens have access to smartphones, Chinese smartphone users make up about 63% of its overall population, and Indian smartphone users make up only 32% of its population.

As a better alternative to traditional emerging market index funds, Carter pointed to the Emerging Markets Internet & E-Commerce ETFs (NYSEArca: EMQQ), which includes access to emerging businesses linked to online retailers and the growing e-commerce industry. To be included in the ETF’s underlying index, companies must derive most of their profits from e-commerce or internet businesses such as search engines, online retail, social media, video online, electronic payments, online games and online travel.

However, Carter added that EMQQ was primarily a China story, as China represents over 50% of EMQQ’s underlying portfolio, which is no surprise since e-commerce sales in China are four times greater than those of all the other emerging countries combined.

However, that doesn’t mean investors should ignore the next frontier of consumer markets. Like many frontiers, developing economies are seeing a slew of new e-commerce or internet retail companies coming online.

Alternatively, investors may consider the Next Frontier Internet and E-Commerce ETF (FMQQ) to capture these favorable trends in frontier markets. Strong economic growth, attractive relative valuations and a focus on consumer names and the internet – the most attractive sectors – could provide an excellent opportunity for investors to take a more targeted approach to these frontier economies. Carter also notes that the population of the next frontier is four times larger than China, providing a large consumer base to support a growing internet and e-commerce industry. The Next Frontier also offers a bigger consumer growth story with only around 5% e-commerce penetration among FMQQ’s underlying countries.

Finally, investors can focus on the vast consumer base in India with the recent launch Indian Internet & E-Commerce ETF (NYSE Arca: INQQ), which tracks the India Internet and Ecommerce Index and owns around 20 shares. The rookie ETF could be an ideal way to capitalize on India’s favorable demographic trends.

Carter noted that India is expected to have the largest population in the world within the next two years. India’s Gen Z, or younger demographic, is larger than China and the United States combined. India is also the fastest growing major economy, with the International Monetary Fund forecasting a GDP growth rate of 8.2% in 2022, compared to 4.4% for China and 3.7% for the states. -United. The IMF even estimates that India will become the third largest country. the global economy over the next decade.

Fueling this expected growth in India, the burgeoning middle-income household will have greater discretionary purchasing power. Middle-income households are expected to make up 78% of India by 2030, up from 54% in 2018.

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

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Melissa C. Keyes