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McCall’s Call: Emerging Market Consumer ETFs

For the first time, helped along by the "Great Recession," consumers from emerging markets are outspending U.S. consumers. And, true to the ETF's reputation for delivering hyper-focused investment exposure, two ETFs are already on the market that hone in on the wave of rising consumerism in the developing world.

Matthew D. McCall

For those interested in hedge-fund replication strategies, a
number of ETFs are on the market to help calm investors’ nerves
and lower daily price swings. So, I want to focus on those,
including those that soften the blow of volatility by going both
long and short.

With real wages on the rise and middle classes forming, emerging market consumers now account for 34 percent of global consumption versus 27 percent for their U.S. counterparts. Consider families around the developing world that suddenly have disposable income. Instead of saving their newfound wealth, they are increasingly spending the money and putting it back into the local economy.

A U.S.-based multinational such as Coca-Cola ( KO ) generates three-quarters of its sales overseas and already reflects the new reality. Revenues are booming for Coke in places like China and Brazil, and particularly in India and even Turkey.

But the best way to take advantage of the consumer growth in the emerging markets is to own the companies based in those countries. And the two ETFs that offer just that are focused on two of the hottest economies in the world:China and Brazil.

Olympic Ambitions

China's rapid growth in the last five years as it prepared for the 2008 Summer Olympics and 2010 World Expo is a good example of how infrastructure investments can be a boon to an economy.

So it follows that two huge factors behind expectations for Brazil's growth are that the South American country is set to host the 2014 FIFA Men's World Cup and the 2016 Summer Olympics.

The Global X Brazil Consumer ETF (NYSEArca:BRAQ) is designed to capture the consumer spending in Brazil that will almost surely increase along with investments in preparation for these two global sporting events.

The sector allocation of the ETF is as follows:35 percent to food & beverages; 25 percent to retail; 19 percent to personal & household goods; 16 percent to travel & leisure; and 6 percent to media. Companies in the ETF must either be domiciled in Brazil or have their main business operations in Brazil.

By limiting the maximum allocation for any one stock in the ETF to 4.75 percent, the fund provides the diversification needed for a niche emerging market ETF. It's based on the Solactive Brazil Consumer Index.

The expense ratio of 0.77 percent may seem a touch high, but I think it's acceptable because investors are paying for exposure they could only achieve by investing directly in stocks that trade only in Brazil. The ETF is less than a month old and only has $1.6 million in assets, but I expect that will rise substantially in coming months.

The Chinese Consumer

The China story is not much different from that of Brazil's, and the Global X China Consumer ETF (NYSEArca:CHIQ) is designed with the same objective as BRAQ.

Unlike the Brazil-targeted ETF, the China-focused ETF can only own stocks that face no restrictions regarding foreign ownership. It's also cheaper than the Brazil fund, with an expense ratio of 0.65 percent.

CHIQ has about half of its allocation in retail and food stocks, with consumer services and autos dominating the other half.

It's been around since December 2009 and has risen 5 percent since July 23. Over the same time frame, the S&P 500 is unchanged, and the iShares FTSE/Xinhua China 25 Index ETF (NYSEArca:FXI) of China's 25 biggest Hong Kong-listed companies is down 8 percent. Because CHIQ has been around for eight months, assets under management are much larger than BRAQ, and now total $74 million.

Long-Term Story

Even though such niche emerging market ETFs will experience plenty of volatility along the way, they're not considered trading vehicles and should be viewed as long-term investment plays.

Investors that believe in the continued growth of the emerging market consumer and the emergence of the middle class should consider buying and holding BRAQ or CHIQ and other ETFs that come out with similar strategies.

I believe the emerging market consumer will be one of the main driving forces of the global economy over the next decade, and I'm ready to park some money in the Global X ETFs.

Matthew D. McCall is editor of The ETF Bulletin andpresident of Penn Financial Group LLC, a Ridgewood, N.J.-based wealth management firm specializing in investment strategies using ETFs.

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Copyright ® 2010 Index Publications LLC . All Rights Reserved.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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