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Macro View

With the current issues in the American market and European woes seemingly never-ending, we are once again reminded of how susceptible many emerging markets are to developed nations’ conditions.

Several emerging markets—like China—are very dependent on exporting goods to industrialized nations in order to power their growth, and when these product destinations are struggling, many developing nations can be in for a rough ride.

This situation doesn’t just afflict China either, as a number of other emerging markets, both large and small, are particularly impacted by this trend. Among just some of the markets that have to play off of developed market trends include several natural resource exporters in South America like Brazil, as well as high tech manufactures in Asia such as South Korea or Taiwan.

This is rather unfortunate as many investors look to emerging markets to provide their portfolios with growth during these troubling times. After all, even with these export woes, many top emerging markets are growing at a 5%+ rate, a level that virtually any developed nation would kill for (read Forget China Buy These Emerging Market ETFs Instead).

Fortunately, not all emerging markets fall into this export trap, as there are several that rely on domestic consumption in order to power growth. These markets, since they are so focused on domestic events, could thus be better insulated from global shocks and developed market issues, making them potentially better plays in this economic environment.

In order to play these domestically-focused emerging market economies we are utilizing data from the World Bank on household final consumption expenditures as a percentage of GDP. This metric represents the market value of all goods and services, including durables and imputed rent, and broadly represents what percentage of the economy is devoted to spending.

Admittedly, this isn’t a perfect measure of domestic insulation from global shocks, but it is arguably a solid predictor of which nations are able to hold up their economies when others a world away are facing issues (see the Guide to Small Cap Emerging Market ETFs).

With this caveat, we highlight three ETFs below of countries that devote more than 75% of their GDP to household final consumption, potentially offering up some interesting choices for investors looking to emerging markets that are driven by developing nations instead of their First World counterparts:

Market Vectors Egypt Index ETF (EGPT - ETF report)

Barely making the 75% cut, Egypt is a nation in transition thanks to a move towards ‘Democracy’ following the ‘Arab Spring’. Although the country struggles with this shift, the nation does have a great deal of positives such as a young population, enviable geographic position, and a solid growth rate.

The country can easily be played with the Market Vectors Egypt ETF EGPT, a fund that tracks the Mark Vectors Egypt Index. This benchmark costs investors 94 basis points a year in fees and gives exposure to just over 25 firms in total (read Top Three Emerging Market Dividend ETFs for Income and Growth).

From a sector perspective, financials do take up a big chunk of assets, followed by telecoms and basic materials. However, large caps account for just over half the assets, so the product should have a pretty hefty tilt towards pint sized securities.

iShares MSCI Philippines Investable Market Index Fund (EPHE - ETF report)

Another economy that relies on consumption is the island nation of the Philippines. While the country may not rank highly on ease of doing business surveys, the nation does have a huge population, many of whom who speak English, and a low labor cost. This combo has made it increasingly popular among a number of businesses, helping to boost the country’s economy in the near term.

These trends can be targeted with EPHE, a relatively inexpensive ETF that charges just 59 basis points a year in fees. The ETF holds over 40 stocks in its basket, but allocates roughly 25% to the three biggest firms in the benchmark, so there is some concentration risk (read Three Emerging Market ETFs to Limit BRIC Exposure).

From an industry look, diversified industrials take the top spot at about a quarter of total assets, while real estate and banks make up another 30% as well. Beyond that, telecoms also make up a sizable chunk, although there is definitely a large cap tilt in this fund.  

iShares MSCI Turkey Investable Market Index Fund (TUR - ETF report)

Thanks to its important location at the crossroads of Middle East and West, Turkey is now on many investors’ radars. While inflation might be relatively high in the country, it too has a young and growing population as well as a relatively low debt load and a GDP per capita that ensures most of the nation is well within the consuming class.

While the country is increasingly popular among both tourists and investors, only one ETF currently targets the country, TUR. This fund tracks the MSCI Turkey Investable Market Index, charging 59 basis points a year in fees but holding a robust 94 stocks in its basket.

Financials do dominate the fund at just under 50% of the total assets, but the next few sectors are very consumer oriented including staples at 13%, and also telecoms at 9% of the fund (read Five Emerging Market Infrastructure ETFs for the Coming Boom).

The ETF is also pretty large cap oriented, but it is actually the most popular on the list with over 200,000 shares in volume a day, suggesting tight bid ask spreads for investors seeking a different way to play emerging markets. 

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