beyondbrics

Emerging markets have long been a source of deep temptation and of market-shaking risk, especially in the current environment. Everyone knows there’s opportunity. The question is just how to find it.

Enter emerging market ETFs, which are becoming increasingly targeted on countries, business sectors and even risk.

Say you’ve just read a McKinsey report that tells you the middle class in India will grow from 32m households to 147m by 2030. That should mean good things for consumer products in India. But with the current market swings and overall volatility of emerging markets, picking the right equities is a risky proposition.

Cue narrowly-targeted, emerging market ETFs, which are allowing investors to quickly and cheaply take a diversified position in specific sectors in India and other markets.

“We think India is one of the biggest consumer opportunities,” says Bob Holderith, president and founder of EG Shares, which offers a variety of highly specialised emerging market ETFs. “The difficulty lies in the cost and the time and the complexity in getting into these markets. We’ve learned how complex it is and we’ve learned how to navigate it.”

For example, EG offers an ETF that specifically tracks Indian consumer stocks – one of many that are tailored to a specific country and sector. Stocks in the fund include Hindustan Unilever (HINDUNILVR:NSI), Colgate Palmolive India (COLPAL:NSI), Bajaj Auto (BAJAJ-AUTO:NSI) and India Hotels Co (INDHOTEL:NSI).

Another example: Brazil is set to host the 2014 World Cup and 2016 Olympic Games. This will deliver a big boost to infrastructure investment. Hence the EG Shares Brazilian infrastructure fund, which includes Telesp (TLPP4:SAO), Tractebel Energia (TBLE3:SAO) and ALL America Latina Logistica (ALLL3:SAO).

It’s all part of anticipating what economic trends in emerging markets means for investors, Holderith says.

“Rule number one in investing is to get in front of flows in capital,” he says. “With the amount of money being spent on infrastructure and by the consumer, there’s a tremendous amount of capital flows.”

Like any investment, these funds have their risks, especially in emerging markets. EG Shares seeks to mitigate this with HILO – a high income, low beta ETF that aims to minimize volatility with a broad selection of stocks including Kimberly Clark Mexico (KIMBERA:MEX), Total Access Communications of Thailand (DTAC:SET) and Jiangsu Expressway of China (600377:SHH).

“We try to always do the best we can to manage risk,” Holderith says. “We understand that one of the fears about emerging markets is the risk, so we have selectively chosen a portfolio of 30 emerging market stocks that have been, and we think will continue to be, less volatile than the markets overall.”

They may not be able to predict the future, but Bruno del Ama, CEO of GlobalX, says his company works to analyse current trends and position its funds for the coming decade, leading them to stress particular sectors of emerging markets.

“Essentially, we think about how the world will look 10 years from now,” he says.

While potentially a powerful tool, these ETFs are sensitive to EM volatility and are aimed at investors looking to the long term or for specific exposure.

“Obviously, these are funds that are mores specific and less diversified by nature, because that is what they are supposed to achieve,” del Ama says. “[Investors] have to have a good idea of the exposure they are trying to achieve and why they’re trying to achieve that.”

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