Get Direct Exposure to Emerging-Markets Consumers With This ETF
We take a closer look at this fund's holdings, valuations, and near-term risks.
There is a lot to like about EGShares Emerging Markets Consumer (ECON). This fund invests in 30 large-cap consumer services and consumer goods firms domiciled in the emerging markets (which in this case excludes Taiwan and South Korea). Many of these companies, such as Brazilian brewer and soft drink company AmBev (ABV), Mexican convenience store operator and coke bottler FEMSA (FMX) and Russian grocery chain Magnit are well-run, market-dominating companies with industry-leading profit margins. Given ECON's concentrated exposure to large, high-quality, well-established firms, this exchange-traded fund's underlying index has been less volatile than the benchmark MSCI Emerging Markets Index and has delivered significantly better risk-adjusted returns over the past five years. We think this fund is a solid option for exposure to emerging markets.
ECON's holdings are well positioned to benefit from strong growth in the consumption of food, clothing, entertainment, and leisure activities in the decades to come, thanks to rising income levels, urbanization, and a relatively young population in many emerging markets. At first glance, these firms’ shares appear very pricey. ECON is currently trading at 23 times trailing 12-month earnings, a significant premium to the MSCI EM Index’s 11 times trailing 12-month earnings. This can be partly attributable to strong investor demand for the firms in ECON’s portfolio, as there are relatively fewer consumer names in emerging markets—consumer companies account for about 17% of the MSCI EM Index, which is lower than their 23% weighting in the S&P 500 Index. We also note that while ECON’s P/E premium versus the MSCI EM Index has widened over the past three years, ECON’s P/E premium versus an index of global consumer firms and U.S. consumer firms has been relatively steady over the same time period, which suggests that ECON’s current valuations are not expensive relative to its global consumer peers (although consumer firms as a group are a little pricey, as they are trading at P/E multiples that are slightly higher than their 10-year average).
Patricia Oey does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.