The world of exchange-traded funds (ETFs), like the broader financial landscape in general, tends to follow particular trends and hot areas. Two focal points that seem to be perpetually trendy are emerging markets (EM) and the internet. ETFs focusing on these areas don't necessarily see automatic success, but they do have strong track records in recent history.

Given this interest, it would seem to be a natural move to combine those two focal points into a single ETF. Indeed, the Emerging Markets Internet & Ecommerce ETF (EMQQ) is proof that a vehicle drawing on both emerging markets and the internet can achieve massive success.

EMQQ founder Kevin Carter explains his approach simply in a Wall Street Journal piece, saying that his team focuses on "the fastest-growing part of the fastest-growing markets." He continues by explaining that "billions of people are entering the consumer class ... and are leapfrogging traditional consumption by getting computers in their pockets." Furthermore, the use of smartphones and tablets around the world has only continued to expand in recent years.

Key Takeaways

  • Emerging markets and internet tech have both been hot sectors for investors over the past decade.
  • In 2014, an ETF known as the Emerging Markets Internet & Ecommerce ETF (EMQQ) was created to capitalize on combining these sectors.
  • The ETF, therefore, invests in emerging markets companies that focus on the internet and related technologies.

Focus on Internet-Based Revenue

EMQQ is designed to track an index comprising publicly traded companies that derive at least half of their revenue from either e-commerce or internet activity and in emerging or frontier markets. The ETF focuses on companies with a minimum market cap of $300 million. A representative sample of some of the top holdings for EMQQ includes well-known internet names like Tencent Holdings Limited (TCEHY), Alibaba Group Holding Limited (BABA), and Baidu, Inc. (BIDU).

The ETF was founded in 2014, but Carter explained that it "didn't go anywhere for the first two years – in fact, it went down." Carter believes that this initial lackluster performance was a result of emerging markets themselves generally being out of favor during that time. Despite the fact that the fund's underlying holdings saw solid revenue and earnings growth through the next several years, the larger financial world's sentiments toward emerging markets prevented EMQQ from seeing significant success.

Changing Investor Sentiment

Since that time, though, investor feelings have shifted. Now, many investors are highly focused on emerging markets ETFs, according to Zacks Investment Research director of ETF research Neena Mishra. Mishra suggests that investors are "concerned about stretched valuations of U.S. stocks and political discord in Washington."

By comparison, EM stocks have become increasingly attractive, largely thanks to improving corporate earnings and macroeconomic fundamentals around the world. Mishra says that the fund currently maintains a high exposure to China but that it could move toward a more diversified position in the future as "many promising e-commerce and internet companies" in places like India continue to go public.

The Bottom Line

As the middle class in large-population countries like these continues to grow and gain access to untapped e-commerce businesses, there remains significant room for development. Adding to this is the Indian government's efforts to encourage citizens to adopt digital technology following a November 2016 demonetization procedure that prompted a cash crunch. According to Seeking Alpha, a KPMG survey predicted that e-commerce around the globe could double by 2020, accounting for $4.1 trillion by that point in time.