For investors with longer timelines, emerging market stocks are still a top draw. After all, the market sector features favorable working-age demographics, rising middle class wealth, enviable GDP growth and vast commodity resources.
And even with the recent hiccups, the long term promise of these nations is favorable.
Given those facts, it’s no wonder why the two most popular exchange traded funds (ETFs) that track emerging markets — the iShares MSCI Emerging Markets (EEM) and Vanguard Emerging Markets Stock Index ETF (VWO) — have a combined $80 billion dollars of investor money.
But riding those hiccups are a bit unnerving — especially if you’re getting close to retirement. Over the longer haul, volatility can zap a portfolio’s total returns.
Luckily, there’s a new ETF that hopes to profit from emerging market’s future growth by investing in less volatile and more familiar stock names.
BCHP ETF — A New Way To Add Emerging Markets
As the planet’s economy grows ever more interconnected, companies from various developed countries have increasingly looked beyond their own mature economies for bigger growth opportunities abroad. As the prospects in the emerging world have presented themselves, many firms — across all sectors — have plowed headfirst into making emerging markets a critical part of their strategy.
Overall, analysts at Goldman Sachs (GS) estimate that firms in the S&P 500 receive about 5% to 6% of their total revenues from emerging markets. That’s a fairly small amount. However, some developed market companies derive a substantial portion of their profits from emerging markets — to the tune of 30 to 80%.
It’s these firms that the new EGShares Blue Chip ETF (BCHP) hopes to profit from.
The new BCHP ETF will track the EGAI Developed Markets Blue Chip EM Access index. That metric is an equally weighted, 30-stock index designed to capture developed market stocks that have quality, meaningful and growing revenue from emerging markets. EGShares defines “meaningful revenues” as being greater 22% of the company’s total as well as being grown over the last two years. On average, BCHP’s index firms receive 47% of the revenues from emerging markets.
The fund spreads holdings across companies based in the U.S., Europe and Japan. Current top holdings include toothpaste manufacturer Colgate-Palmolive (CL), Taco Bell/KFC parent Yum Brands (YUM), and beverage maker Anheuser Bush InBev (BUD). Consumer names make up about 40% of the underlying BCHP fund — with the U.S. (37%), U.K. (13%) and Switzerland (10%) make up the largest holdings geographically. All in all, BCHP’s holdings read like a “who’s who” of global multinational giants. All the names should sound familiar to investors.
Expenses for BCHP run at 0.60% — or $60 per $10,000 invested. That’s not too expensive for an emerging market fund, but is a little high for a U.S. or developed market stock ETF.
Should You Get Emerging Markets Exposure Through Global Blue Chips?
There are plenty of reasons why investors may want to add some exposure to BCHP to their portfolios.
First, multinationals with a significant presence in emerging markets have delivered huge profit growth over the last few years. According to data from business consulting firm Bain & Company, average profit and revenue derived from a firm’s emerging market subsidiaries has grown by an average of 14.7% and 15.4% over the last five years, respectively. That’s nearly double the gains of the parent stock.
Secondly, volatility associated with BCHP’s portfolio should be substantially less than directly investing in emerging market stocks. Emerging markets are prone to booms & busts. Those swings are often reflected in the share prices of funds like EEM. Developed market stocks have fared better and haven’t necessarily had those wild swings. BCHP’s 2.56% dividend yield also helps cushion the downside.
Unfortunately, EGShares doesn’t include any volatility data in its marketing materials for the fund. That’s a big drawback, as this is major consideration when adding BCHP to a portfolio. But in theory, the safety of the U.S. and Developed Europe should provide some amount counterbalance to emerging market volatility. Another potential strike is that EGShare’s doesn’t provide any sort of historical return data for the in-house created index.
All in all, BCHP provides an interesting way to really target emerging market growth without directly owning emerging market stocks. While I wouldn’t give up on funds like iShares Core MSCI Emerging Market ETF (IEMG) just yet, BCHP could provide an interesting side-play for portfolios — that is, if it lives up to its promise. This is one ETF to check back on in a year’s time and see how asset growth and trading volume has progressed. Likewise, investors should wait to see just how BCHP fares in the volatility category relative to direct emerging market stocks or ETFs.
As of this writing, Aaron Levitt was long IEMG