Is Your Emerging Markets ETF Actually Emerging?

It’s time to redefine which countries are emerging markets, and this ETF hits the nail right on the head

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Is Your Emerging Markets ETF Actually Emerging?

Emerging Markets … the Next Class

If you’ve never heard of the Global X Next Emerging & Frontier ETF (EMFM), don’t worry. You’re not alone — because it was launched only a few days ago.

However, odds are good that EMFM will build a name (and an asset base) for itself pretty quickly, as it gives investors something they desperately need … even if they don’t realize they need it yet.

Markets featured in EMFM include Argentina, Bangladesh, Kazakhstan, Slovakia, and Vietnam, reflecting the also-recently launched Solactive Next Emerging & Frontier Index.

Most of the countries that make up the index would be difficult for the average person to locate on a map, and those that aren’t “frontier markets” (an even riskier but even more growth-oriented classification) fit the true definition of “emerging market.”

And what’s that definition?

Perhaps Dr. Vladimir Kvint, President of the International Academy of Emerging Markets, has the clearest and most through definition:

“An emerging market country is a society transitioning from a dictatorship to a free-market-oriented-economy, with increasing economic freedom, gradual integration with the global marketplace and with other members of the global emerging market, an expanding middle class, improving standards of living, social stability and tolerance, as well as an increase in cooperation with multilateral institutions.”

That’s certainly not China. China is as much of a global commerce hub as any other country. Its middle class is now officially a consumer class, and at its current pace will soon be China’s key source of economic growth. Ditto for Brazil, and to a lesser degree, South Korea. They’ve all pretty much emerged.

Argentina, Kazakhstan, Vietnam, and several other smaller nations that are well represented in the Global X Next Emerging & Frontier ETF, on the other hand, are just now starting to experience the “a-ha” moment Kvint described. Indeed, Global X specifically describes this fund’s holdings as investments that go beyond the BRICs (Brazil, Russia, India and China) and beyond the most developed tier of emerging markets, which means countries like South Korea and Taiwan are also excluded.

As for putting the potential growth of the new emerging markets in perspective, the Global X fact sheet for its new ETF provides some eye-opening stats. The most salient ones are:

  • Countries represented in the (Solactive) index represent 24% of the world’s population, but just 12% of the world’s GDP, and only 8% of the world’s equity market cap.
  • Frontier markets not only have low investment-performance correlations to developed economies’ stock, but even show low correlations among their emerging market peers.
  • Emerging and frontier markets are home to younger populations that are growing faster than their developed peers. These economies tend to offer more competitive labor forces better positioned to become the world’s next big suppliers of inexpensive labor.

Granted, the data nuggets are self-serving for the Global X fund, but they’re accurate points nonetheless. There’s a lot of “catchup” potential from these markets, and that means outsized growth for the fund’s investors for at least several years (not unlike the strong growth we’ve seen from the arenas that were considered to be emerging markets 10 years ago).

Bottom Line

It’s time to start rethinking, in a deeper way, exactly why we take on emerging market exposure, and how we go about doing that. The Global X Next Emerging & Frontier ETF is a step in the right direction.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2013/11/emerging-markets-etf-emfm/.

©2014 InvestorPlace Media, LLC

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