Of late, there has been a surge in Internet and e-commerce-based stocks and ETFs all over the world. The industry is developing fast with the increased use of social networking sites and online trading as well as the growing adoption of smartphones and other mobile Internet devices. While the craze for such services is steady and saturated in the U.S., the real drive lies in the under-penetrated emerging markets.
Sensing the immense potential in this space, an ETF targeting emerging and frontier market Internet stocks was launched on November 13, 2014 in the name of Emerging Markets Internet & eCommerce ETF (EMQQ - Free Report) . Let’s take a look inside this new product below (read: Guide to Internet ETFs).
EMQQ in Detail
This new ETF looks to track the Emerging Markets Internet and Ecommerce Index, which is designed to measure the performance of the internet and e-commerce companies of emerging and frontier markets.
The index provider considers companies from Asia, Latin America, Africa and Eastern Europe. Country-wise, China takes the highest allocation in the fund. The fund charges 86 bps in fees (read: 3 Hot China ETFs for Singles Day).
The fund holds 42 companies in total. Current top holdings for this ETF include Alibaba (8%), Tencent (7.5%), Naspers (7.0%), JD.com (6.5%) and Baidu.com (6.0%). Roughly half the portfolio is in the top 10 securities, so there definitely is some concentration risk, especially considering that all the companies in the ETF are in pretty much the same sector (read: Alibaba Investors Cheer Revenue Growth, ETFs to Benefit).
How Does it Fit in a Portfolio?
This ETF could be appropriate for investors seeking a new way to play emerging and frontier markets that have a tilt toward one of the most important and fastest growing segments in this key area. Greater exposure in Chinese e-commerce industry also exposes investors to a booming sector of that nation (read: China Internet ETF: The Best Choice in the Space?).
Notably, China is possibly the most important emerging market and has ample room for expansion in the technology sector that will support its journey toward becoming a developed nation. To leverage this growing demand in the sector, China expects its technology sector to contribute 5% of GDP now, 8% in 2015 and 15% by 2020.
Moreover, investors have seen enough of developed markets’ technology stocks which presently rule the globe. Through this new fund, investors can access an untapped but promising sector. Investors should also note that the index EMQQ follows is the maiden index to target emerging and frontier markets at one go.
As a caveat, we would like to note that it is too much concentrated in a volatile sector of emerging markets. Investors having strong nerves to withstand volatility in the presently withering global economy might find the product is a good choice. Moreover, heavy exposure to the sagging China market might cause weaker trading volumes, while you could also see higher bid/ask spreads.
EMQQ’s fresh concept helps it to find no exact competitor though a handful of ETFs are presently being operated in the market with a similar kind of exposure. Among these, CSI China Internet ETF (KWEB) looks to be its nearest competitor. Several other Chinese ETFs including Guggenheim China Technology ETF (CQQQ) and Global X NASDAQ China Technology ETF (QQQC) can also pose threats to the new fund.
Though the three ETFs mentioned above are cheaper than the newly launched product, we believe, expense ratio will not be a hurdle to risk-loving investors who look to capture this brand new space.
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