Over the next 10 years, Russell Investments expects emerging market equities to outperform U.S. equities by 1 percent on an annualized basis, and beat global developed markets by 50 basis points.
Investors have several active and passive mutual fund and ETF options for accessing emerging markets.
EMQQ, for example, returned 37.8 percent year-to-date through June 30, and posted 41.6 percent annualized 12-month returns. Since its November 2014 inception, EMQQ has had average annualized returns of 8.05 percent.
The ETF’s top holdings include Alibaba, Tencent Holdings, Naspers, Baidu, JD.com and NetEase.
While EMQQ might seem like a satellite position or a compliment to a core emerging markets holding in a portfolio, Carter says it might be used interchangeably with broader indexes.
“I’ve actually become quite militant that this is the only thing you should own in emerging markets,” says Carter. “The reason people buy emerging markets is growth, but broader indexes don’t just own the growth companies. They own a lot of the wrong companies, too. Investing in growth of the emerging market consumer, on the other hand, lands you in companies that are growth oriented,” are often backed by U.S. venture capital, and that tend to have strong corporate governance.
Carter notes that many broad emerging-markets ETFs, such as the Vanguard FTSE Emerging Markets ETF (VWO) and Schwab Emerging Markets Equity ETF (SCHE), track indexes that do not buy U.S.-listed companies like Alibaba that operate primarily in emerging markets. That decision eliminates many overseas internet-based companies from their investment universe.
EMQQ had $151.8 million in assets as of June 30, and sports an expense ratio of 0.86 percent.
EMQQ's other broad index-based competitors include IEMG, the iShares Core MSCI Emerging Markets ETF and EEM, the iShares MSCI Emerging Markets ETF. ETFs offering more targeted exposures include EMCG, the WisdomTree Emerging Markets Consumer Growth Fund, and ECON, the Columbia Emerging Markets Consumer ETF.
Though many active equity managers have suffered through a prolonged period of underperformance, emerging markets may be one place where active management shines.