Deep Dive: This emerging-market ETF continues to blow away the competition

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Back in July 2015, during the middle of a major pullback for shares of Chinese companies, Kevin Carter, the founder of the Emerging Markets Internet & Ecommerce ETF, said his fund had significant downside protection when compared to the dominant emerging-markets index funds and ETFs, as well as better upside potential.

The ETF declined significantly from there, even more than its rivals through the middle of 2015, but it has greatly outperformed three of its largest competitors through the recovery of Chinese stocks and after:

FctSet

Total return for EMQQ since it was first traded on Nov. 13, 2014, through March 13, 2018.

Carter credits the $533 million Emerging Markets Internet & Ecommerce ETF’s EMQQ, +0.57% outperformance to its focus on the emerging-market industries with the quickest sales growth and its lack of investments in state-controlled companies.

The broad emerging-market indexes have performed very well of late, but Carter’s strategy has performed even better. EMQQ is passively managed and tracks the performance of Emerging Markets Internet & Ecommerce Index, which Carter helped create and chairs the index committee. The ETF’s largest investments are Tencent Holdings Ltd. 0700, +1.08%  and Alibaba Group Holding Ltd. BABA, +2.20% Carter calls both companies “must-owns for long-term investors,” in part because both continue to make large investments in many emerging internet-based companies that haven’t yet gone public.

During an interview on March 8, Carter said both companies’ sales growth had accelerated to “close to 60%.” Looking at the most recent quarterly numbers supplied by FactSet, Tencent’s sales increased 63% from a year earlier, while Alibaba’s sales grew by 61%. A year earlier, both companies’ quarterly sales were up 44%.

Performance comparison and some technical stuff

The Emerging Markets Internet & Ecommerce ETF was launched in November 2014, so there wasn’t much of a record to go on in the 2015 article. Now that the ETF is three years old, Morningstar has assigned it a five-star rating.

Before digging into its strategy, here’s how its performance has measured up against three of the largest passively managed funds that Carter seeks to outperform:

Ticker Total assets ($mil) Total return – 2018 through March 13 Total return – 2017 Average annual return – 3 years
Emerging Markets Internet & Ecommerce ETF EMQQ, +0.57% $533 6.8% 67.2% 25.0%
Vanguard Emerging Markets Stock Index Fund VEIEX, -0.13% $95,800 3.3% 31.2% 9.7%
Vanguard FTSE Emerging Markets ETF VWO, +0.12% $71,100 3.3% 31.4% 9.9%
iShares MSCI Emerging Markets ETF EEM, +0.16% $44,250 3.2% 36.4% 11.1%
Source: Morningstar Direct

In comparison, Morningstar’s Diversified Emerging Markets fund category (which also includes actively managed funds) has returned 2.8% this year through March 13, after returning 34.2% during 2017. The category’s average annual return for three years through March 13 was 10.2%.

The total return comparisons on the table are based on net asset values (NAV), so there can be a fair comparison between the three ETFs, the Vanguard Emerging Markets Stock Index Fund VEIEX, -0.13%  (an open-ended mutual fund) and the Morningstar category.

Shares of an open-ended mutual fund aren’t publicly traded and can only be purchased or sold at the end of each trading day. The share price is really the NAV, which is the market value of the fund’s assets divided by the number of shares outstanding. ETFs calculate NAV as well, but they also have share prices because they are publicly traded throughout each trading day. An ETF’s share price may be above or below its NAV, although usually they are close.

The Vanguard Emerging Markets Stock Index Fund and the Vanguard FTSE Emerging Markets ETF VWO, +0.12%  track the FTSE Emerging Markets All Cap China A Inclusion Index. The iShares MSCI Emerging Markets ETF EEM, +0.16% tracks the MSCI Emerging Markets Index.

Strategy

In May, Ryan Vlastelica pointed out that the two Vanguard funds weren’t holding shares of Alibaba. FTSE’s policy at that time was not to include shares of the company — or of Baidu Inc. BIDU, +0.39%  — in the FTSE Emerging Markets All Cap China A Inclusion Index because those stocks were listed in the U.S. That policy was changed in September, so Alibaba is now the fourth-largest holding of the two Vanguard funds, while Baidu is the 16th-largest holding.

Carter said FTSE’s policy change will likely mean improved performance for the Vanguard funds.

“I lost a marketing advantage. It was really easy to tell an investor that [the Vanguard emerging-market index fund and ETF] owned Petrobas and Bank of China, but not Alibaba or MercadoLibre,” he said.

MercadoLibre Inc. MELI, -0.35% which runs e-commerce and online auction sites in Latin America, is the sixth-largest holding of EMQQ. Neither the FTSE Emerging Markets All Cap China A Inclusion Index nor the MSCI Emerging Markets Index include the stock.

Carter mentioned Petrobas (the Brazilian oil company) and Bank of China because both are government-controlled even through they are publicly traded. The Emerging Markets Internet & Ecommerce Index doesn’t include government-controlled companies because Carter believes they won’t be as efficiently run as those controlled by nongovernment shareholders.

He also believes EMQQ will have a continual advantage over the largest emerging-market index funds and ETFs because of its narrow focus on the rapidly growing internet and e-commerce space.

Comparison of fund holdings

Here are the 10 largest equity holdings of the Emerging Markets Internet & Ecommerce Index as of March 13:

Company Ticker Country Industry % of fund Change in sales – most recent reported quarter from year earlier
Tencent Holdings Ltd. 0700, +1.08% China Internet Software/ Services 8.0% 63%
Alibaba Group Holding Ltd. ADR BABA, +2.20% China Internet Retail 6.9% 61%
Naspers Ltd. Class N NPN, -0.45% South Africa Cable/ Satellite TV 6.8% N/A
Baidu, Inc. ADR Class A BIDU, +0.39% China Internet Software/ Services 6.1% 34%
MercadoLibre Inc. MELI, -0.35% Argentina Internet Software/ Services 5.8% 71%
JD.com, Inc. ADR Class A JD, -0.52% China Internet Retail 5.7% 43%
Yandex NV Class A YNDX, +1.66% Netherlands Internet Software/ Services 5.0% 36%
NetEase Inc. ADR NTES, +0.82% China Internet Software/ Services 4.7% 25%
Naver Corp. 035420, +1.36% South Korea Internet Software/ Services 4.5% 17%
Ctrip.com International Ltd. ADR CTRP, -0.10%   China Other Consumer Services 4.1% 42%
Source: FactSet

You can click on the tickers for more about each company, including stock performance, news, price ratios and performance.

Yandex NV was incorporated in the Netherlands but conducts most of its business in Russia.

Here are the 10 largest holdings of the Vanguard Emerging Markets Stock Index Fund and the Vanguard FTSE Emerging Markets ETF:

Company Ticker Country Industry % of fund Change in sales – most recent reported quarter from year earlier
Taiwan Semiconductor Manufacturing Co. 2330, -0.78% Taiwan Semiconductors 5.4% 6%
China Construction Bank Corp. Class H 0939, +0.12% China Major Banks 2.2% 9%
Alibaba Group Holding Ltd. ADR BABA, +2.20% China Internet Retail 2.1% 61%
Taiwan Semiconductor Manufacturing Co. ADR TSM, +0.36% Taiwan Semiconductors 1.7% 12%
Industrial and Commercial Bank of China Ltd. Class H 1398, -0.43% China Major Banks 1.6% 10%
Ping An Insurance (Group) Co. of China Class H 2318, +3.43% China Multi-Line Insurance 1.5% 20%
Sberbank Russia ADR SBER, +0.16% Russia Regional Banks 1.2% 8%
Hon Hai Precision Industry Co. 2317, +0.11% Taiwan Computer Peripherals 1.0% 0%
China Mobile Ltd. 0941, +0.28% China Wireless Telecommunications 0.9% 2%
Housing Development Finance Corp. 500010, -0.27% India Finance/ Rental/ Leasing 0.8% 12%
Source: FactSet

And here are the 10 largest holdings of the iShares MSCI Emerging Markets ETF:

Company Ticker Country Industry % of fund Change in sales – most recent reported quarter from year earlier
Tencent Holdings Ltd. 0700, +1.08% China Internet Software/ Services 5.9% 63%
Samsung Electronics Co. 005930, -0.43% South Korea Telecommunications Equipment 4.1% 24%
Taiwan Semiconductor Manufacturing Co. 2330, -0.78% Taiwan Semiconductors 3.8% 6%
Alibaba Group Holding Ltd. ADR BABA, +2.20% China Internet Retail 3.8% 61%
Naspers Ltd. Class N NPN, -0.45% South Africa Cable/ Satellite TV 2.3% N/A
China Construction Bank Corp. Class H 0939, +0.12% China Major Banks 1.6% 9%
Baidu, Inc. ADR Class A BIDU, +0.39% China Internet Software/ Services 1.2% 34%
Industrial and Commercial Bank of China Ltd. Class H 1398, -0.43% China Major Banks 1.2% 10%
Ping An Insurance (Group) Co. of China Class H 2318, +3.43% China Multi-Line Insurance 1.0% 20%
China Mobile Limited 0941, +0.28% China Wireless Telecommunications 1.0% 2%
Source: FactSet
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