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Kevin Carter, EMQQ

Emerging market internet and e-commerce ETF EMQQ enjoys fundamental growth


Since etfexpress interviewed EMQQ founder Kevin Carter last May, the ETF, which tracks emerging market internet and e-commerce companies, has enjoyed enormous growth – hitting USD500 million in assets and performance of 68 per cent in 2017.

Carter (pictured) says: “Since May last year we have had a sort of breaking out in terms of both the performance and investor interest in the fund. What we are invested in is emerging market internet companies such as Alibaba and Tencent. That’s what we own and emerging markets had a good year last year, relative to their dismal decade before.”

The big picture story for EMQQ – awarded an overall and three-year, five-star rating from Morningstar for the period ending December 31 2017 earlier this year – remains the same, Carter says.

“EMQQ is a story of four things crashing together at the same time. Consumers in the emerging markets are a well-documented story. When I started a decade ago, 85 per cent of the world lived in developing countries and were moving on up and becoming consumers, wanting more and better food, clothing and appliances. They want the same things we want. That is the biggest part of the story.”

Then, he says, there is the growth of computer and smart phone ownership in the region. The smart phone represents the first computer for most of the world putting computers into the hands of emerging market consumers and giving them the Internet, largely for the first time.

“In the West we take high speed internet access for granted,” Carter says. “But it’s a huge consumer wave in the emerging markets. If you give them technology and the Internet, then the final part is you get entrepreneurs. Often people who have worked for large technology companies locally who are breaking out and becoming entrepreneurs.”

Citing the increase in home delivery of goods, through Internet shopping, Carter says that this is a brand new thing in the developing world, that had never had that consumption rate.

“The top line revenue growth of the companies in the EMQQ story is unprecedented. There has never been a sector of companies that has produced the fundamental growth that EMQQ has.”

And, with certain caveats, apply to Carter personally for more details, he offers a USD100,000 reward for anyone who can match the performance of the companies inside EMQQ for top line revenue growth.

EMQQ turned three years old on November 13, 2017 with the three-year performance on that date an average of 14.92 per cent annually, compared to 10.24 per cent for the S&P 500 and 5.70 per cent for the MSCI Emerging Markets Index.

EMQQ seeks to track, before fees and expenses, the performance of EMQQ The Emerging Markets Internet and ECommerce Index, which requires that its constituents derive at least half of their revenue from Internet and e-commerce businesses in emerging or frontier markets. 

The index is agnostic when it comes to exchange listing or company domicile; as long as a company generates more than half of its revenue in emerging markets, it is eligible for consideration for inclusion in the index. As of December 31, 2017 the top five country exposures were China (65.11 per cent), South Korea (11.12 per cent), Russia (9.8 per cent) South Africa (6.44 per cent), and Argentina (3.71 per cent). India was sixth at 1.54 per cent.

The fund rebalances every six months in June and December and companies within the index have to have at least a market capitalisation of USD300 million. Beyond that, there is a cap on the largest stock representing more than 8 per cent of the index so on the rebalances, the fund sells down or deletes stocks that no longer fit the criteria.

Performance this year has been more challenging with the ETF currently reflecting the sideways movement of the stocks in the sector and registering a drop of 15 per cent, despite a fundamental growth rate in the sector of 35 per cent. 

This is partly a reflection of the new trade war between President Trump’s US and the rest of the world, but principally China. 

“The market expresses people’s sentiment about things,” Carter says. He recalls from his days studying economics that, in the past, trade wars were considered bad things, a loser’s game.

“But the fact is that the Chinese government is smart and well-co-ordinated and have done things to benefit themselves so it’s probably quite true that they have gotten the best of us and I am not sure that what is happening now is the right way to fix that.”

However, in terms of the new tariffs, Carter points out that they are largely about chicken feed and soya beans.

“Our story is about people buying Chinese stuff on Chinese websites. One sector not fundamentally affected is the emerging market internet sector.”

 
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