Global X challenges EMQQ with its own EM internet & e-commerce ETF

Nov 16th, 2020 | By | Category: Equities

Global X has launched its version of one of the most successful emerging market strategies in recent years.

Chelsea Rodstrom, Research Analyst at Global X ETFs

Chelsea Rodstrom, Research Analyst at Global X ETFs.

The Global X Emerging Markets Internet & E-commerce ETF (EWEB US) has listed on Nasdaq Exchange and comes with an expense ratio of 0.65%.

The fund invests in companies from developing countries with operations linked to internet and e-commerce activities, a strategy that closely mirrors the approach of the well-established $1.3 billion EMQQ Emerging Markets Internet & Ecommerce ETF (EMQQ US).

EMQQ, which comes with a chunkier expense ratio of 0.86%, has consistently outperformed the broader emerging markets equity universe with a return of 215.7% over the past five years, as of 13 November, compared to 83.7% for the MSCI Emerging Markets Index.

This performance gap has widened during the Covid-19 pandemic environment with EMQQ up 61.9% year-to-date compared to just 6.6% for the benchmark.

The underlying investment proposition is to tap into the emerging markets growth story by targeting the converging themes of growing middle-class consumption and digitalization.

According to the IMF, when using exchange rates that are adjusted for purchasing power parity, nearly three-quarters (74%) of global growth in 2018 was attributable to emerging markets. The IMF further notes that emerging markets’ consumption has already surpassed that of developed markets and is expected to be responsible for 84% of global consumption by 2023.

These high-growth trends are supported by a burgeoning internet-connected middle class that is forming new technology-enabled consumption patterns and driving the growth of e-commerce platforms across all emerging market regions globally.

Chelsea Rodstrom, Research Analyst at Global X ETFs, commented, “There is a convergence of themes playing out in emerging markets that’s accelerating consumers’ engagement with online platforms. Education, wages, consumption, and internet connectivity are all increasing in tandem with emerging markets’ economic development.

“In many cases, this new generation of consumers is skipping physical retail experiences in favor of digital ones. Global X has a long history of providing investment solutions for both emerging markets and technology investing. With EWEB, we’re thrilled to leverage our expertise in these two areas to provide our investors access to this exceptional growth story.”

Methodology

EWEB is linked to the Nasdaq CTA Emerging Markets Internet & E-commerce Index which selects its constituents from an initial universe of emerging market stocks, including American Depository Receipts, with market capitalizations greater than $1bn and average daily trading volume above $5 million.

Eligible companies must have primary businesses that include internet retail commerce, internet-related services, internet software, or internet search engine, and must derive at least half of their revenue from internet or e-commerce related activities, as determined by the Consumer Technology Association, a US-based standards and trade organization.

The methodology selects the largest 50 eligible stocks and weights them by float-adjusted market capitalization subject to a cap of 8% on each of the top five positions and a cap of 4% on any other company. Reconstitution and rebalancing occur semi-annually.

EWEB’s methodology is essentially akin to that underpinning EMQQ bar a few slight differences. Most notably, EMQQ includes all eligible companies and uses lower market cap ($300m) and average daily turnover ($1m) thresholds, leading to a broader portfolio of over 80 names. The weighting approach is similar between the two ETFs.

EWEB’s portfolio is overweight Chinese companies which account for three-quarters (74.0%) of the total exposure compared to around 60% for EMQQ. EWEB’s next-largest country exposures are Brazil (7.0%), South Korea (6.8%), and South Africa (4.5%).

Consumer discretionary and communication services make up the bulk of EWEB’s sector exposures with weights of 53.7% and 39.4%, respectively.

There is considerable overlap in constituents with near-identical top holdings. For EWEB, this includes Pinduoduo (12.2%), Meituan (8.5%), JD.com (8.4%), Tencent Holdings (8.2%), Alibaba (6.5%), Baidu (4.2%), Naspers (4.0%), and MercadoLibre (4.0%).

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