During the Covid pandemic, many companies in emerging markets have suffered large downturns and big losses. Internet companies were the general exception, having benefited from government-issued stay-at-home orders. However, a significant crackdown on Chinese tech stocks over the last few months has seen their share prices tumble. Fresh fines issued by Chinese regulators over the weekend are likely to hurt their share prices even further.
That said, I’m bullish about the long-term prospects of internet and e-commerce companies in China and other emerging markets. There’s widespread and growing mobile internet adoption, an expanding middle class and in many emerging market countries, a young population.
As I think about how to take advantage of this long-term trend, I’m looking into an interesting exchange traded fund (ETF). And ETF is a fund that track an index or sector and can be bought and sold like shares through most online brokers.
The ETF
The fund I’m researching is HANetf ICAV EMQQ Emerging Markets Internet & Ecommerce UCITS ETF (LSE: EMQQ), which — as the name tells us — tracks the EMQQ Emerging Markets Internet & Ecommerce Index.
This tracks web firms across a wide variety of sectors including online retail and social networking. The index also covers a diverse range of countries such as Brazil, China, India and Turkey.
To be in the index, the companies must be publicly traded, derive their revenue from internet and e-commerce activities in emerging markets and have a market cap of at least $300m.
This fund should provide me with exposure to the growth of web-based activities in the developing world. A twice-yearly review of the index means I should also benefit from any new companies entering this space.
Despite the quite high ongoing charge for an ETF (at 0.86%), I still like this fund because of the diversity of the companies held. Although the holdings are market cap-weighted, they’re capped at 8%, meaning that if one or two of the companies suffer, the downside impact to the fund should be limited.
Diving into some of the largest holdings reveals some well-known names. The biggest holding is Alibaba, which has an impressive record of growth. Though there’s some debate about how successful its sales for China Singles Day 2021 were, they were definitely up from last year. It also has a cloud computing business, similar to Amazon’s, which is growing.
The second-ranked holding is Tencent, which has a diverse business including video-gaming, digital payments and social network services. It also owns assets outside of China including holdings in Snap.
Looking at fund performance, there are no surprises. It’s down around 7% on the year, reflecting the Chinese authorities’ crackdown on technology companies. However, over five years, the fund is up around 90%. Given the growth of e-commerce in emerging markets, this is the kind of healthy return I like to see.
Should I invest?
There’s a strong argument for adding it to my portfolio, but I’m not going to invest yet. Although this ETF is diversified across several countries, it’s too heavily weighted towards China for my liking.
Given the size of China’s economy and the market-cap-weighted nature of the index, the dominance of Chinese firms is unsurprising and as China’s economy grows, I think this dominance could even increase.
I prefer to see how China’s regulatory environment develops over the next few months before investing.
