The Big Emerging Markets: Consumption Vs. Commodity Play

by: Paul Allen

Despite the fact that emerging market ETFs underperformed developed markets on a year to date basis so far, the investment region itself cannot be ignored over the long run. Emerging markets will still grow on a faster pace than developed economies and therefore the reasons for an investment remains compelling.

In an investment region where granularity matters, it is important to understand the main underlying drivers of each emerging market ETF. Two factors may be at work. The first one is commodity related, as many of the emerging countries that are specialized in the commodity production have been profiting by China's booming infrastructure spending in the past. The second one is population growth, which will be definitely a significant driver in the future as it will lead to an increasing middle-class, which should spur local consumption. According to a Goldman Sachs report, "emerging markets are transforming from the 'Age of commodities' to the 'Age of consumer durables', which will present new opportunities for investors".

To analyze the transformation level from commodities to consumption, we have calculated an equal weighted composite of the MSCI Emerging Markets Consumer Staples Index and the MSCI Emerging Markets Consumer Discretionary Index versus a composite of the MSCI Emerging Markets Materials Index and the MSCI Emerging Markets Energy Index since 2001. Furthermore we have plotted the ratio between those two composites, including a 200 days exponential moving average. According to the Consumption/Commodity ratio, commodity related investments have strongly outperformed the consumption ones until 2008. Afterwards, this effect turned the other way round as the more consumption oriented investments have been the main performance driver within emerging markets. One reason for this outcome might be the fact that the strong economic growth rates in the past have helped to provide greater wealth, which is now being unfolded.

Emerging Markets Consumption vs. Commoditiy

So if investors want to play the transformation from the commodity to the consumption theme within emerging markets, it is definitely useful to analyze the sector weightings of each emerging market ETF. For that reason, we have calculated the consumption and the commodity sector exposure of the most popular emerging market ETFs which are available in the U.S:

  • Vanguard FTSE Emerging Markets ETF (NYSEARCA:VWO)

  • Global X FTSE Colombia 20 ETF (NYSEARCA:GXG)

  • iShares China Large-Cap ETF (NYSEARCA:FXI)

  • iShares MSCI All Peru Capped ETF (NYSEARCA:EPU)

  • iShares MSCI Brazil Capped ETF (NYSEARCA:EWZ)

  • iShares MSCI Chile Capped ETF (NYSEARCA:ECH)

  • iShares MSCI Malaysia ETF (NYSEARCA:EWM)

  • iShares MSCI Mexico Capped ETF (NYSEARCA:EWW)

  • iShares MSCI Philippines ETF (NYSEARCA:EPHE)

  • iShares MSCI Poland Capped ETF (NYSEARCA:EPOL)

  • iShares MSCI South Africa ETF (NYSEARCA:EZA)

  • iShares MSCI South Korea Capped ETF (NYSEARCA:EWY)

  • iShares MSCI Taiwan ETF (NYSEARCA:EWT)

  • iShares MSCI Thailand Capped ETF (NYSEARCA:THD)

  • iShares MSCI Turkey ETF (NYSEARCA:TUR)

  • Market Vectors Indonesia Index ETF (NYSEARCA:IDX)

  • Market Vectors Russia ETF (NYSEARCA:RSX)

  • WisdomTree India ETF (NYSEARCA:EPI)

The table below shows the consumption (consumer discretionary and consumer staples) and the commodity (basic materials and energy) sector exposure for the most important emerging market ETFs, ranked according to their delta between those two sector themes.


With a total consumption exposure of almost 33 percent, Indonesia has the highest exposure, followed by Mexico (29.31%) and the Chile (29.25%). Russia has by far the highest allocation to commodities (58.33%), followed by Peru (40.25%) and Brazil (29.52%). Interestingly, the MSCI Emerging Market ETF is well balanced between those two themes. If we focus on the delta between the consumption and commodities sector allocation, we can see that Indonesia has the highest relative exposure towards consumption and Russia has by far the lowest one. In total, there are 8 markets that have a larger allocation to consumption rather than to commodities.

The bottom line: selectivity within emerging markets will be crucial as the underlying performance drivers have changed from commodity towards consumption. For that reason, investors should consider those factors in their investment valuation as in the long run it may make a huge performance difference in their portfolio. A full sector breakdown of all mentioned EM sector ETFs can be downloaded in spreadsheet-format here.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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