Emerging market equities are not for the faint of heart. Even the most iron-bellied investors in the sector have had their share of heartburn over the past year.
First there was Fed tapering … and the slow-motion currency crisis that followed in Turkey, South Africa and Argentina, among others. Then there was the on-again/off-again unrest in Turkey and Venezuela. And now, we have the Russia/Ukrain crisis that has yet to be resolved.
Yet despite the turbulence, emerging markets collectively account for about 40% of global GDP, and that percentage is only going to rise with time. Already, China is projected to overtake the United States as the world largest economy as early as this year.
For investors who want exposure to emerging market growth without the heartburn associated with emerging market equities, there is an alternative: multinationals domiciled in the U.S., Europe and other developed markets that get a large percentage of their revenues from their operations in emerging markets.
In Macro Trend Investor, I’ve made this “emerging markets lite” concept a primary investment theme over the past four years. It was a major factor in my decision to make Nestle (NRSGY) and Unilever (UL) — two European blue chips that respectively get 44% and 57% of their revenues from emerging markets — part of my Core Dividend portfolio.
Now, Emerging Global Advisors has made it possible to get an entire portfolio of these emerging-market-lite gems with one trade via the EGShares Blue Chip ETF (BCHP).
I’ve written about EGShares before, most recently highlighting the Beyond BRICs ETF (BBRC), an ETF with fantastic exposure to frontier markets and less-followed emerging markets such as Indonesia, South Africa and Turkey. BBRC has had a fantastic year — despite the massive fund outflows that have affected emerging markets as a whole in 2014, BBRC has managed to grow its assets under management from $22 million at the start of the year to $162 million as of late April.
Getting back to BCHP, the ETF is based on the “EGAI Developed Markets Blue Chip EM Access index,” an equally weighted index of 30 developed market companies with growing revenue from emerging markets. To make the cut, a stock must meet the following criteria:
- Must have a market cap of at least $2 billion.
- Must get at least 22% of its revenues from emerging markets, and emerging-market revenues must be growing.
- Ideally, there is an emphasis on the consumer sector.
The index is reconstituted annually in September and rebalanced quarterly to maintain the equal weighting.
The 22% exposure to emerging markets may seem like a fairly low threshold, but the companies that make up the S&P 500 collectively only get about 14% of their revenues from emerging markets. And BCHP exceeds its own benchmark by a wide margin; the holding with the lowest exposure still pulls in 26% from emerging markets, and the average for the portfolio is a whopping 47%.
Let’s take a look under the hood to see what BCHP holds in its portfolio. There are definitely some familiar names for Macro Trend Investor readers; Colgate Palmolive (CL), Diageo (DEO), Swatch Group (SWGAY) and Tenaris (TS) are all current or former recommendations. I’ve also recently highlighted Telnor (TELNY) (see 3 European Stocks to Buy) and Yum Brands (YUM) (see Yum Brands Expanding in the Wrong Country).
EGShares Blue Chip ETF Top Holdings (Based on Emerging Market Revenue)
|Company||Ticker||% of Revenue Reported as Emerging Market|
|Pacific Rubiales Energy Corp||PEGFF||100%|
|Millicom Intl Cellular||MIICF||77%|
|Wynn Resorts Ltd||WYNN||71%|
|Old Mutual PLC||ODMTY||68%|
|Asustek Computer Inc||ASUUY||66%|
Two interesting omissions from the full list of holdings are Unilever and Nestle. Given their outsized presences in emerging markets, their consumer tilt, and their prestige as global blue chips, you would think they would be natural fits.
Alas, it comes down to reporting. In order for a stock to be included in BCHP’s portfolio, it must break out its emerging market revenues in its financial reporting. While Nestle and Unilever both proudly disclose their exposure to emerging markets, the figures are usually buried in the annual letter or in supplementary materials rather than broken out in the financial statements.
This is too bad, because both companies — and no doubt plenty of others that are disqualified for the same reason- would be excellent additions to the ETF and its underlying index.
Still, on balance, there is a lot to like here. BCHP offers fantastic exposure to emerging market growth via a portfolio of blue-chip multinationals. There are times — such as this year — when exposure to emerging markets can make a company something of an investment pariah. But over any realistic investment horizon, I would expect BCHP’s focus on emerging markets to deliver solid results.
Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he was long CL, DEO, NSRGY, SWGAY, TS and UL. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.