Piranka
Investment Thesis
Emerging Markets Internet & E-Commerce ETF (NYSEARCA:NYSEARCA:EMQQ) should be held because it has high risk and expense ratios compared to the potential returns. This fund is expected to grow in the future due to the rise in internet consumption and E-commerce, which caters to the middle class in emerging markets, is likely to continue to underperform.Furthermore, there are alternative global internet and e-commerce funds that, with lower expense ratios and potentially lower risk, could better capture emerging market demand.
ETFs compared with fund overview
EMQQ is an actively managed ETF. Aiming to acquire emerging market companies Internet and e-commerce industry fund. Launched in 2018, the fund is rebalanced semi-annually and holds 112 stocks with $377.25 million in assets under management. By sector: The foundation places the greatest emphasis on communication. (41.74%), followed by consumer goods (34.74%) and finance (9.33%). By country, EMQQ has the largest weighting. It is followed by China (53.37%), India (16.22%) and Argentina (7.73%). As we will explain in more detail later, the primary objective of this ETF is to capture the growth of the emerging market middle class, which is demanding products such as smartphones and embracing online commerce.
Other funds examined for comparison are the Vanguard FTSE Emerging Markets ETF (VWO), iShares Core MSCI Emerging Markets ETF (Electronic money), and the Global XE Commerce ETF (EBIZFor investors looking for a well-diversified emerging markets fund, VWO is comparable to its Schwab counterpart Emerging Markets Fund (ChezVWO is the largest fund by assets under management and the most diversified ETF reviewed. IEMG has The focus on information technology is 22.54% Financial stocks account for 20.17%. It is a very diversified fund with nearly 3,000 stocks, but it has a stronger emphasis on technology stocks than VWO. Unlike other funds, EBIZ is technically a global fund Compared to emerging markets, EBIZ’s country weightings are US 51.0%, China 23.10% and Canada 7.3%. EBIZ is the least diversified with only 40 stocks in its holdings.
Fund Comparison: Performance, Expense Ratios, Dividend Yields
Emerging market funds saw a strong rise in value in 2020 and peak in 2021, driven primarily by Chinese tech companies. For example, Taiwan Semiconductor Manufacturing Co. (XTAI:2330) and Tencent Holdings (XHKG:700) shares nearly doubled in 2020 alone. EMQQ’s strong 2020 returns were then almost entirely lost by the end of 2023. EMQQ’s five-year average annual return was -0.29% with a total return of 13.75%. In comparison, peer funds have recorded similar or higher returns with lower volatility: VWO’s five-year average annual return is 2.69%, IEMG’s five-year average return is 2.80%, and EBIZ’s five-year average return is 6.70%.
Five-year total price returns: EMQQ and comparable emerging market funds (Seeking Alpha)
The big drawback for me is that EMQQ has a high expense ratio of 0.86%, which is higher than all other funds in the comparison. The average expense ratio for ETFs is 0.57%This would make sense if EMQQ was a consistently outperformer. But as we’ve said, that’s not necessarily the case. VWO and IEMG are broadly diversified and have respectable dividend yields. EMQQ’s focus on internet and e-commerce holdings means it has a much lower dividend yield of 0.72%. However, EMQQ’s dividend has grown at a three-year CAGR of 29.23%.
Comparison of expense ratios, assets under management, and dividend yields
|
EMQQ |
VWO |
Electronic money |
EBIZ |
|
|
Expense ratio |
0.86% |
0.08% |
0.09% |
0.50% |
|
Assets under management |
$377.25 million |
$103.81 billion |
$77.67 billion |
$67.51 million |
|
Dividend Yield (Last 12 Months) |
0.72% |
3.38% |
2.78% |
N/A |
|
Dividend Growth Rate 3-Year CAGR |
29.23% |
14.74% |
7.98% |
N/A |
Source: Seeking Alpha, June 1, 2024
EMQQ Holdings and Emerging Markets Outlook Factors
With 112 stocks, EMQQ is less diversified than the broader VWO and IEMG funds. However, it does hold similar stocks such as Reliance (XNSE:RELIANCE) and Tencent Holdings. As EBIZ is a global fund, EMQQ also holds Sea Limited (Southeast).
Comparison of EMQQ and the top 10 emerging market ETFs
|
EMQQ – 112 holdings |
VWO – 5,846 held |
IEMG – Holdings 2,941 |
EBIZ – 40 holdings |
|
Reliance – 8.80% |
2330 – 7.02% |
2330 – 7.40% |
CVNA – 8.11% |
|
700 – 8.32% |
700 – 3.40% |
700 – 3.62% |
SE – 6.53% |
|
9988 – 7.73% |
9988 – 2.00% |
005930 – 2.96% |
WSM – 4.99% |
|
Meri – 7.65% |
Reliance – 1.49% |
9988 – 1.85% |
TCOM – 4.80% |
|
PDD – 7.56% |
HDFC Bank – 1.28% |
Reliance – 1.21% |
GDDY – 4.63% |
|
3690 – 7.32% |
PDD – 0.95% |
PDD – 1.06% |
Ebay – 4.56% |
|
NPN – 3.69% |
3690 – 0.92% |
000660 – 0.90% |
JD – 4.16% |
|
9618 – 3.45% |
939 – 0.76% |
3690 – 0.82% |
Win Rate – 4.05% |
|
SE – 3.45% |
Infi – 0.75% |
ICICIBC – 0.81% |
4755 – 3.98% |
|
NETTF – 3.19% |
2317 – 0.72% |
939 – 0.80% |
RBA – 73.49% |
Source: Multiple, edited by author on June 24
Looking forward, there are several reasons to be cautiously optimistic about emerging market funds and EMQQ. While emerging markets have seen significant underperformance, there are several growth drivers that could reverse this trend. However, EMQQ’s holdings are based in emerging market locations, which brings significant risks. In contrast, EBIZ has a stronger position as its primary holdings are physically located in developed countries yet are able to capitalize on emerging market growth. We discuss these outlook drivers in more detail below.
Why traditional emerging market funds are underperforming
Emerging markets have significantly underperformed the U.S. domestic stock market over the past 25 years. The S&P 500 has a 10-year total return of over 170%, while emerging markets have been roughly flat. A domestic bias, investment flight to emerging markets over the past decade, and geopolitics have all contributed to the poor performance over the past two decades. But the more immediate drivers are: Emerging market stocks are simply below average Earnings. Price-to-earnings ratios and earnings per share growth have been low and even negative in many years.
Emerging Markets Equity Performance (Macrobond)
Another risk factor is that emerging markets tend to be heavily biased towards certain sectors and companies, as can be seen today with Taiwan Semiconductor Manufacturing Co. and Tencent Holdings Ltd. Emerging markets only account for around 27% of global market capitalization, making ETFs especially sensitive to a few key holdings.
EMQQ has greater potential than larger, diversified emerging market funds
Emerging markets have underperformed over the past decade, but there are reasons for optimism. Emerging markets recently accounted for only about 27% of global market capitalization, but this is due to the fact that A big increase from 19% in 2009Goldman Sachs predicts: Emerging markets will reach 47% in 2050 It accounts for 60% of global GDP, and much of this phenomenal growth is due to the growth of the middle class in emerging markets. Asia-Pacific’s middle class is exploding Meanwhile, middle-class population growth in Europe and North America has stagnated.
Projected growth in middle-class population by region (Statista, June 1, 2012)
According to Global X, e-commerce is Less than 20% to 23% of global retail sales by 2027The emerging market middle class will consume new goods and services such as mobile phones and the internet, and therefore, while the broader VWO and IEMG capture more diverse sectors of the emerging markets, I believe EMQQ is best poised to capture the consumer demand of this growing middle class.
Why EBIZ is likely to outperform EMQQ
Although EMQQ has a competitive advantage over the broadly diversified VWO and IEMG, it has a major disadvantage in that many of its holdings are from emerging market countries. Global retail e-commerce is expected to increase Year-over-year growth of over 8% is expected, but this growth will not necessarily be captured by companies physically located in emerging countries.
Global e-commerce sales growth by 2026 (eMarketer, 2022)
Importantly, EBIZ is an ETF that captures holdings that benefit from both the emerging market middle class and the growth of e-commerce, while also mitigating the risk of a company’s physical location. GoDaddy (goodGoDaddy, EBIZ’s fifth largest holding, is an example of a U.S. company that is benefiting from the growth of emerging markets by selling its services to 200 markets around the world. According to the company’s most recent annual report, GoDaddy states: Accounts for 48% of customer base and approximately one-third of revenue It was from an overseas source. eBay (Ebay) is another company that provides e-commerce in 190 counties. About 9% of eBay’s tangible assets are outside the United States, 50% of the company’s net revenue came from overseas.In their most recent annual reports, the companies predicted that geopolitical risks would decline while capturing consumer demand in emerging countries.
Current Rating
In emerging markets Relative success compared to developed markets This has helped to keep inflation in check. Moreover, emerging markets have performed well over the past year due to strong global demand. As a result, all emerging market funds surveyed have achieved returns of over 10% since summer 2023. Notably, EMQQ has achieved returns of over 20% over the past year, almost as strong as the S&P 500 Index. However, EBIZ, which includes US internet and e-commerce holdings globally, has underperformed.
1-Year Performance: EMQQ vs. Comparison ETFs (Seeking Alpha)
As a result of the strong performance of EMQQ and EBIZ, the valuations of both funds are high relative to the broadly diversified VWO and IEMG. Looking at price-to-earnings and price-to-book multiples, EMQQ is more attractive than EBIZ but significantly more expensive than VWO and IEMG. However, given the unique strengths of EMQQ and EBIZ, we do not consider VWO and IEMG to be buys for the reasons already stated. In contrast, EBIZ has the highest P/E and P/B ratios, but we believe it has the best potential to capture emerging market earnings growth.
EMQQ and peer evaluation metrics
|
EMQQ |
VWO |
Electronic money |
EBIZ |
|
|
P/E Ratio |
24.85 |
14.50 |
15.22 |
27.96 |
|
P/B ratio |
2.60 |
2.10 |
1.78 |
3.97 |
Source: Compiled by the author from multiple sources, June 1, 2024
Risks for investors
As already mentioned, emerging market funds all carry a significant level of risk due to their concentration in certain sectors and companies, as well as geopolitical risk. Overall volatility can be measured by the standard deviation of each fund. EMQQ and EBIZ both have a standard deviation of around 30 over the past five years and a beta relative to MSCI Emerging Markets of 1.52. This is relatively high volatility, but we believe that EBIZ has low geopolitical risk due to its global diversification. Many other factors, such as China-Taiwan tensions and China’s internet restrictions, all represent unknown variables and additional risks for investors.
Conclusion
10 years 2010 and 2020 were the worst decades for emerging market returns There are multiple reasons why I believe emerging markets are poised for a recovery, the first time since the 1930s. One of these is the large growth in the middle class population, which is driving consumer demand for goods and services such as cell phones and internet access. Thus, while VWO and IEMG may be more diversified with their broad base, EMQQ is well poised to capture this demand. However, EMQQ’s top holdings still face significant risk. For this reason, I believe EBIZ, which includes both emerging market and US-based companies, is better poised to capture this emerging market growth. Finally, EMQQ has the highest expense ratio of any of the comparable funds, which is a major negative in my opinion.
