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EGShares Emerging Markets Consumer ETF (ECON)

Today’s Daily Alert brings you a thorough new fund recommendation from The Cash Cow.

“The aptly-tickered EGShares Emerging Markets Consumer ETF (ECON, $25) focuses on the 30 largest-capitalization consumer product companies in emerging markets, with top weightings in Mexico, Brazil, South Africa, India and Chile.

“The fund tracks Dow Jones’s Emerging Markets...

Today’s Daily Alert brings you a thorough new fund recommendation from The Cash Cow.

“The aptly-tickered EGShares Emerging Markets Consumer ETF (ECON, $25) focuses on the 30 largest-capitalization consumer product companies in emerging markets, with top weightings in Mexico, Brazil, South Africa, India and Chile.

“The fund tracks Dow Jones’s Emerging Markets Consumer Titans Index, and as such is weighted by market capitalization. This means that ECON’s $419 million in assets is spread among very large, established companies with clear market dominators in their respective niches, such as Latin America’s Ambev (9.6% of assets) or South Africa’s Naspers (8% of assets). According to Morningstar, over half the fund’s holdings have wide economic moats around their businesses.

“As befits its targeted nature, ECON is most exposed to heavily consumer-oriented sectors such as food staples, retailers, and beverages. Importantly, ECON is also diversified across the main emerging markets. Forty-eight percent of the fund is engaged in Latin American companies, 17% in Africa and the Middle East and 30% in Asia. Interestingly, ECON only devotes 5% of assets to China, preferring to play India, Malaysia and Thailand as better choices for the consumer growth theory.

“Like most international equity ETFs, ECON does not hedge its foreign currency exposure. This is important, since the fund’s stocks are traded all over the world. Obviously, a rising dollar will negatively impact the total returns from these positions, as will further flight of international capital to less volatile shores. In addition, some of ECON’s positions are traded in low-liquidity markets, meaning a little bit of selling can have an exaggerated effect on a particular security, even when it is a major blue chip in its respective market.

“However, it cuts both ways. A falling dollar will positively impact international positions, and virtually all the countries in ECON’s portfolio boast budget surpluses, strong reserves and, when compared to the U.S. and Europe, enviable economic growth prospects. Meanwhile, low liquidity becomes a good thing when fund flows reverse towards riskier areas; historically, money managers returning to emerging markets after a period of volatility instinctively flock to the of larger-cap, safer names first, which will help push ECON’s stocks upward.

“With only 30 positions, this ETF has more concentration risk than our usual recommendations. In fact, its top ten holdings account for 56% of the fund’s assets. But these positions are all top-tier blue chips, which takes some of our angst away, and are almost entirely allocated to consumer defensive (31% of assets) or consumer cyclical (51% of assets) industries. Importantly, financials are absent from ECON’s book.

“ECON is up roughly 6% so far this year, and has traded between $19 and $25 since the end of 2010. Technically, the ETF is running along an encouraging upward-sloping trend line that, if it holds, will bring ECON back to its highs of last April in relatively short order. Trading liquidity is decent, averaging 121,000 shares per day, and the bid/ask spread is minimal. Note that ECON is fairly expensive, at 0.85% of assets versus a minimal dividend yield of 0.53%. But we think its blue-chip orientation and its strategic bet on the emerging-market consumer story is worth it. Buy.”

- Steven Lord & Stephen Leeb, The Cash Cow, October 2012