In America, the consumer drives a large portion of its economy, and when demand for goods and services dips, it has huge ramifications on the entire economy. In emerging markets, the consumer is becoming a larger part of the growth story, as the middle class continues to grow.
Investors wanting to participate in the emergence of the baby boomer have several options, ranging from niche ETFs to individual stocks. As in most cases, an ETF will lower risk due to its diversification into a basket of stocks. This may be even more true when it comes to a niche sector, such as the emerging market consumer. (For more, see How To Pick The Best ETF.)
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The EG Shares Emerging Markets Consumer (ARCA:ECON) is a basket of 30 stocks that are based in emerging market countries around the globe. Mexico (19%), Brazil (18%), South Africa (16%) and India (13%) make up the majority of the allocation. The sector breakdown is diverse, with beverage stocks, general retailers, food producers and automobiles at the top of the list.
Since ECON began trading on Sept. 14, 2010, the ETF is up 19% versus a gain of only 1% by the iShares Emerging Market ETF (ARCA:EEM). The outperformance is large, considering the short time frame. However it is important to note that so far in 2012 EEM is up 15% versus a gain of 11% by ECON. The ETF charges an expense ratio of 0.85% and the dividend yield on the index is 1.82%.
EG Shares also offers two similar consumer ETFs that concentrate on the emerging markets. The EG Shares Consumer Services GEMS ETF (ARCA:VGEM) concentrates more on the retail and media sectors, with heavy concentration in South Africa and Mexico. The EG Shares Consumer Goods GEMS ETF (ARCA:GGEM) has a bigger concentration on food products, beverages and autos, with India and Brazil as it two largest countries. Both ETFs charge a 0.85% expense ratio.
Brazilian Distribution (NYSE:CBD), a Brazil-based operator of supermarkets and department stores, recently broke out to a new six-month high. The stock will benefit from a growing middle class in Brazil, as well as the influx of tourists that are set to arrive in the coming years for the World Cup and Olympic events. With a PEG ratio of 1.5 and a recent breakout, the stock looks poised to continue its current rally.
Another stock to recently breakout out is Mexican Economic (NYSE:FMX), which is a supplier of beverages throughout Latin America and owns the OXXO chain of convenience stores. With FMX sitting at an all-time high, it is not the best time to chase the price. However, a pullback to support near $71 could be the next big buying opportunity. The stock pays a 1.4% dividend and trades with a PEG ratio of 1.9.
The Bottom Line
Investors that are contemplating investing in the emerging market must realize that above average volatility will accompany any purchase. At the same time, the growth prospects for the emerging market countries, and more specifically, the consumer, are well above average. The reward-to-risk ratio appears to be in favor of the bulls at this time. (For additional reading, check out 5 Must-Have Metrics For Value Investors.)
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At the time of writing, Matthew McCall did not own shares in any of the companies mentioned in this article.