I've always thought that an "emerging markets" ETF consisting of
only U.S. or developed-market companies that get a bulk of their
revenues from emerging markets would resonate with investors-in
essence, a "developed-companies, emerging markets ETF."
That's exactly what MSCI and Russell are aiming to tackle in
their relatively new economic and geographic exposure indexes. In
short, these new indexes target a specific country or region not
based on where the company is domiciled or listed, but on the
company's revenue source.
Not much has been discussed about these indexes, nor do many
folks yet know that they even exist, but I think MSCI and Russell
are on to something new and potentially big here.
In an increasingly global financial market, more multinationals
are getting a majority of their revenues from outside their own
borders. For example, from a brand-name perspective, Coca-Cola is
as American as apple pie. But from a revenue perspective, it's not
as clear, with the soft drink company getting more than half its
revenue from outside the United States.
In an extreme case, Nestle gets less than 5 percent of its
revenues from Switzerland, but gets 35 percent of its revenues from
emerging markets, according to MSCI. Does it still make sense for
Nestle to be only included in the MSCI Switzerland index?
The list goes on. Think of companies like Unilever, McDonald's,
Yum Brands, Nike, Estee Lauder, Pepsi and Adidas. While there have
been numerous debates surrounding country classification (e.g.,
South Korea), little has been talked about regarding whether
investors are truly getting
exposure to emerging markets.
This is especially true in the consumer space.
are gaining in popularity-for example, the EGShares Emerging
Markets Consumer ETF (NYSEArca:ECON) is now a $1.1 billion fund.
Still, the truth is, many of the top consumer brands in emerging
markets are no longer necessarily local companies.
As emerging markets consumers gain more purchasing power,
consumers are increasingly choosing "foreign" brands as a status
symbol, if not because of the "cool" factor, especially with the
younger generation. The sporting goods sector in China is a case in
point. Nike and Adidas have long surpassed local brands in China in
terms of revenues.
MSCI first launched its economic-exposure indexes in March 2012,
starting off with five developed-market benchmarks targeting
emerging markets exposure, including the MSCI World with EM
Exposure Index and MSCI USA with EM Exposure Index.
Since then, the indexing juggernaut has launched 13 more,
included indexes targeting Asia, China and Africa, as well as a
comprehensive emerging markets index that pulls from both developed
and emerging markets, the MSCI ACWI with EM Exposure Index.
To determine a company's economic exposure, MSCI considers a
company's emerging markets multiplier-based on the proportion of
the GDP weight of emerging countries relative to the region as a
whole-and the percent of revenues from the region.
Meanwhile, Russell first launched its GeoExposure Indices in
September 2012. Russell currently has four indexes targeting
emerging markets exposure from developed-market indexes, including
the Russell 1000 EM GeoExposure Index.
Russell determines a company's economic exposure to a region by
incorporating both the total revenues in dollar terms and the
percentage of revenues, derived from the region. It then determines
a composite score based on a weighted average of the
following:percentage of revenues (50 percent); revenues in dollar
terms (25 percent); and market cap (25 percent).
Whether these indexes take off is yet to be seen, but they
certainly open up a new angle regarding what constitutes
emerging markets exposure. At the least, I think it's a good time
for investors to start thinking about corporate revenues in a
After all, from a purely
perspective, does it matter where the company is domiciled if a
significant chunk of their revenues are from emerging markets?
Shouldn't these types of companies carry some weight in an enhanced
For example, the MSCI ACWI with EM Exposure Index looks
particularly attractive in this arena, as it doesn't limit itself
to emerging or developed-country classifications, but simply
measures the revenue exposure to emerging markets of all global
Indexing is certainly evolving, and I wonder if one day these
types of indexes could be the next-generation market-cap weighted
indexes. There are currently no filings from ETF issuers to track
these new benchmarks, but it wouldn't surprise me to see a few in
the near future.
At the time this article was written, the author had no
positions in the securities mentioned. Contact Dennis H
udachek at email@example.com.
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