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Emerging Global Fund Sets Itself Apart

The parade of new ETFs targeting emerging-market consumer stocks continued a few days ago with the immediately popular Emerging Global Shares Dow Jones Emerging Markets Consumer Titans ETF (ECON). This fund challenges the GlobalX China Consumer Fund (CHIQ) and GlobalX Brazil Consumer Fund (BRAQ). Most of Emerging Global's sector funds are very heavy in the BRIC countries, creating the possibility of the fund being a me-too version of GlobalX's existing products, but -- fortunately for investors trying to assess whether to invest in this space -- the newest fund is different.

Mexico is the largest weight, at 20%, followed by India at 16%. South Africa and Malaysia are also prominent in the fund at 14% and 9%, respectively. Brazil at 16% and China at 8% are well represented, but I believe the weighting of the other countries does offer the potential for long-term differentiation from the GlobalX funds -- a positive.

The biggest potential downside is the 20% in Mexico. There are concerns about the near depletion of the Cantarell oil field and the increased violence in Mexico. There are varying estimates as to the potential rate of oil field decline and economic consequence of the violence, but these appear to be the biggest immediate threats. From there it makes sense to ask: Even if these threats end up mattering to Mexico, will it hurt earnings and revenue at Walmart de Mexico, which accounts for 7% of the fund, or at Fomento Economos (FMX), a soda bottler and convenience store operator? The answer could be, "No, this won't matter."

It is important to look at the industries that make up the fund as well to understand that the fund is split evenly between consumer discretionary and consumer staples. These sectors tend to behave differently from each other, with staples leading later in the cycle versus discretionary leading earlier. The even blending of the two potentially makes the fund less cyclical.

From staples there are food producers at 15%, beverages at 14% and food and drug retailers at 10%. On the discretionary side are automotive at 16%, travel and leisure at 12% and media at 11%. One huge benefit to some of these companies, such as autos and airlines, is that unlike their U.S. counterparts, they are not weighed down by such things as massive pensions that have to be funded and benefits to be paid.

For the year ended Aug. 31, the backtested index rose 39% versus just 15% for the iShares MSCI Emerging Market Index Fund (EEM). Taking a longer-term view, since the index's inception in 2005 it was up 14.5% compared with 39% for the iShares fund. The factsheet for the underlying index indicates that the yield for the index is 1.33%, which -- less the 0.85% expense ratio -- means the fund could only be expected to yield 0.48%. The consumer staples sector often offers a chance to add yield to a portfolio. Anyone interested in this fund should consider pairing it with a higher-yield stock from a group such as food or tobacco.

The bottom line for emerging-market consumer stocks is that an increasing number of people living in emerging-market countries are seeing growth in their disposable income, and that money is going to be spent -- this much is certain, as it's already happening. This should mean good things for the companies meeting this demand, which should benefit the Emerging Global Shares Emerging Markets Consumer Titans ETF and, for that matter, the GlobalX Brazil Consumer Fund and GlobalX China Consumer Fund.

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At the time of publication, Roger Nusbaum had no positions in the securities mentioned.

Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback; click here to send him an email.

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