By Philip van Doorn, MarketWatch
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:
Carter credits the $533 million Emerging Markets Internet & Ecommerce ETF’s /zigman2/quotes/205406984/composite EMQQ -0.36% outperformance to its focus on the emerging-market industries with the quickest sales growth and its lack of investments in state-controlled companies.
The broad emerging-market indexes have performed very well of late, but Carter’s strategy has performed even better. EMQQ is passively managed and tracks the performance of Emerging Markets Internet & Ecommerce Index, which Carter helped create and chairs the index committee. The ETF’s largest investments are Tencent Holdings Ltd. /zigman2/quotes/204605823/delayed HK:700 -1.59% and Alibaba Group Holding Ltd. /zigman2/quotes/201948298/composite BABA +1.47% . Carter calls both companies “must-owns for long-term investors,” in part because both continue to make large investments in many emerging internet-based companies that haven’t yet gone public.
During an interview on March 8, Carter said both companies’ sales growth had accelerated to “close to 60%.” Looking at the most recent quarterly numbers supplied by FactSet, Tencent’s sales increased 63% from a year earlier, while Alibaba’s sales grew by 61%. A year earlier, both companies’ quarterly sales were up 44%.
Performance comparison and some technical stuff
The Emerging Markets Internet & Ecommerce ETF was launched in November 2014, so there wasn’t much of a record to go on in the 2015 article. Now that the ETF is three years old, Morningstar has assigned it a five-star rating.
Before digging into its strategy, here’s how its performance has measured up against three of the largest passively managed funds that Carter seeks to outperform:
|Ticker||Total assets ($mil)||Total return - 2018 through March 13||Total return - 2017||Average annual return - 3 years|
|Emerging Markets Internet & Ecommerce ETF||/zigman2/quotes/205406984/composite EMQQ||$533||6.8%||67.2%||25.0%|
|Vanguard Emerging Markets Stock Index Fund||/zigman2/quotes/205715973/realtime VEIEX||$95,800||3.3%||31.2%||9.7%|
|Vanguard FTSE Emerging Markets ETF||/zigman2/quotes/204649024/composite VWO||$71,100||3.3%||31.4%||9.9%|
|iShares MSCI Emerging Markets ETF||/zigman2/quotes/201454250/composite EEM||$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 /zigman2/quotes/205715973/realtime VEIEX +0.94% (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 /zigman2/quotes/204649024/composite VWO +0.71% track the FTSE Emerging Markets All Cap China A Inclusion Index. The iShares MSCI Emerging Markets ETF /zigman2/quotes/201454250/composite EEM +1.09% tracks the MSCI Emerging Markets Index.