Nifty ETF Ideas for the Next Generation of Emerging Markets Investing
Investors are right to be apprehensive regarding emerging markets equities. For roughly a decade, the MSCI Emerging Markets Index and other broad gauges of stocks in developing economies badly lagged domestic stocks.
In other words, the emerging markets juice definitely wasn’t worth the squeeze because that asset class is inherently more volatile than domestic stocks. There are inklings emerging markets equities and the related exchange traded funds could be on the mend. For example, the MSCI Emerging Markets Index is higher by almost 3% year-to-date and some experts believe the time is right to examine international stocks.
For the decade ending last year, valuations and earnings growth expanded more rapidly in the U.S. than abroad, leaving some domestic stocks richly valued and some international equivalents appealing on valuation.
“Still, valuation expansion rose more than our fair-value framework would suggest based on interest rates and inflation,” according to Vanguard. “Altogether, this contributed 3.3 percentage points of outperformance for U.S. stocks compared with their international counterparts.”
Still, in order for investors to better capitalize on a possible emerging markets equity renaissance, it could pay to consider fresh approaches rather than antiquated, plain vanilla strategies. Some of the following emerging markets ETFs fit the bill as “fresh.”
VanEck Digital India ETF (DGIN)
By age alone, the VanEck Digital India ETF (DGIN) is a fresh emerging markets ETF as its just 16 months old. More importantly, it fills the bill as a next generation emerging markets ETF because India is home to an increasingly digital, tech-savvy consumer and retail investor base.
By some estimates, India, which is currently Asia’s third-largest economy, could be the world’s largest in the coming decades. Even if that doesn’t happen, it’s likely to be number three in the world in just a few years and be home to the third-largest equity market by 2030. Digitalization – the very theme underpinning the DGIN investment thesis – is at the heart of the country’s economic story.
“India is already the fastest-growing economy in the world, having clocked 5.5% average gross domestic product growth over the past decade. Now, three megatrends—global offshoring, digitalization and energy transition—are setting the scene for unprecedented economic growth in the country of more than 1 billion people,” according to Morgan Stanley.
KraneShares Emerging Markets Healthcare Index ETF (KMED)
The KraneShares Emerging Markets Healthcare Index ETF (KMED) is certainly unique because the universe of dedicated emerging markets healthcare is sparsely populated. Arguably, that’s an oversight when considering healthcare is a global theme and developing economies are some of the largest healthcare markets in the world.
Some emerging markets, such as China, face some of the same demographic challenges as mature markets such as the U.S. and Japan. However, in what could be impactful for KMED, healthcare spending in developing economies has more room to grow. KMED, which follows the Solactive Emerging Markets Healthcare Index, is a potentially attractive way to access the emerging markets healthcare theme because it’s market capitalization and industry diverse.
WisdomTree Emerging Markets ESG Fund (RESE)
Environmental, social and governance (ESG) investing is taking its lumps here in the U.S., but there are unique ways of approaching sustainable/socially virtuous investing. Plus, it pays to recognize ESG is applicable beyond U.S. borders. Enter the WisdomTree Emerging Markets ESG Fund (RESE).
Arguably, RESE isn’t getting the attention deserves because various studies confirm emerging markets equities with strong ESG credentials outperform their lesser ESG counterparts. China, the largest emerging market, is fertile ground for ESG advancement, as highlighted in a recent research paper by Professors of Economics, Brian Viard and Zhang Gang, at Cheung Kong Graduate School of Business.
“After the launch of the Shanghai Connect program in 2014, companies did not see an immediate increase in their ESG ratings relative to unconnected firms,” according to the academics.” However, ESG ratings climbed by 1.3% year-on-year compared to unconnected firms. ESG ratings on the Shenzhen Connect program increased by 4.6% upon entry in the Connect program and then grew by 2.2% per year. The study also finds evidence of spillover effects within the value chain. A non-Connect supplier to a Connect firm increases its ESG ratings after its partner entered the program.”
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.