ETF Expert Corner

Kevin Carter Highlights Emerging Markets Internet & Ecommerce ETF

May 15th, 2018 by ETF Store Staff

Kevin Carter, Founder of EMQQ, spotlights the Emerging Markets Internet & Ecommerce ETF and expands on the investment case for what has been a fast-growing segment of the market.



Transcript

You can listen to our interview with Kevin Carter by using the above media player or enjoy a full transcription of the interview below.

Nate Geraci: The ETF we're spotlighting this week is the Emerging Markets Internet and E-Commerce ETF, ticker symbol EMQQ. Joining us via phone from just outside San Francisco to discuss this ETF is Kevin Carter, Founder of EMQQ. Kevin, great to have you back on the program.

Kevin Carter: Hey, Nate. Great to be here.

Nate Geraci: Kevin, let's just jump right in. We're going to cover a lot of ground today as it pertains to emerging markets, but let's start with EMQQ. Explain for us how the index behind this ETF is constructed.

Kevin Carter: Sure. Well, it's pretty straight forward. It's an emerging markets internet index, meaning that it owns all of the publicly traded internet companies that operate in emerging markets in China, India, Brazil, Russia. And currently, there's about 50 such companies, but that number is growing on a pretty regular basis.

Nate Geraci: Okay, now one of the unique aspects of companies included in EMQQ is they tend to be backed by US venture capital firms and so they end up listing on major US stock exchanges. Can you explain the benefits of that and perhaps how that might result in a different universe of stocks than some of the other broad-based emerging market ETFs?

Kevin Carter: Sure. Emerging markets and the publicly traded companies that are part of emerging markets can generally be thought of in two buckets. There's sort of the old economy, legacy companies, and then there are the more entrepreneurial, new economy companies. And the biggest problem with the traditional indexes for emerging markets are that they're dominated by giant, inefficient, and often times corrupt state-owned enterprises, companies like Petrobras, the Brazilian, state-owned oil company. And these companies aren't really operated on a for-profit basis like a traditional western company we would think of.

On the other side are a wave of internet companies. I mean, the real positive growth story of emerging markets and of the world is that you have billions of people sort of joining the consumer class and that's a well-documented story. Those consumers are starting online. They're getting their first computer in the form of a cheap smartphone. Their first internet access via mobile or wifi. And you have a group of local entrepreneurs - entrepreneurs from India, from China, from parts of Africa - and those entrepreneurs, as they build these internet companies for the developing world, they're for the most part getting funded by professional US-based institutional investors. And that means that you get good corporate governance in a part of the world where things like Petrobras and Chinese banks give you quite the opposite.

Nate Geraci: Kevin, right now top holdings in EMQQ include companies like Alibaba, Tencent, Baidu, pretty well-known companies. Can you maybe highlight a company or two that might be a bit less familiar that you find particularly interesting or compelling?

Kevin Carter: Sure. Well, I'll give you a couple of examples of public companies, and then I'll maybe talk about one or two of the companies that'll soon be coming public. So you're right, Alibaba, Tencent, Baidu, these are well-known companies to most investors here. But there's, as I said, close to 50 companies that are part of this wave. One example is Wuba, W-U-B-A, which is both the ticker symbol and the name of the company, 58.com. Trades on the New York Stock Exchange with that ticker symbol, WUBA. Wuba is the Craigslist of China, if you will. So the marketplace, localized, serving hundreds of cities in China, has a 90% plus growth margin. A very profitable business. And again, most of these companies look like things we have here. They're not exactly the same. They sort of mold themselves to the local needs and ways of doing things, but Wuba is sort of the Craigslist of China.

In South America, you have Mercadolibre. Also trades on the NASDAQ, M-E-L-I, MELI is the ticker symbol. It is both the Amazon, if you will, and the PayPal of Central and South America. So its largest two markets have been Brazil and Mexico. So those are companies that are publicly traded. But there's also dozens and dozens, in fact hundreds of private companies that are part of the story, many of which are sort of indirectly part of EMQQ because the companies, the larger companies like Tencent and Alibaba are prolific investors. And so one of the companies that most of your listeners will hear about, but likely haven't yet, is Dibi, D-I-B-I. And Dibi is the "Uber" of China. It's the largest ride hailing app in the world and a company that's likely to IPO likely on our exchanges sometime in the next year.

Nate Geraci: Our guest is Kevin Carter, Founder of EMQQ. We're spotlighting the Emerging Markets Internet and E-Commerce ETF. Kevin, going back to the investment case here, obviously in the United States, the move to online retail is pronounced. We're seeing a lot of growth in that segment of the market. But when you think about emerging markets, EM consumers typically don't have a car. There's no big box retailers to drive to. So those consumers are essentially skipping traditional retail and going straight online. Can you maybe expand on that and talk about that opportunity in particular? Maybe as it compares to the US?

Kevin Carter: Well, I think you hit it right on the head to start, but yes. We have had here in the United States and other developed markets, we've had a very robust consumption infrastructure. We have big box stores. We have malls. We have strip malls. Most of us have automobiles and the roads are paved. And so we're moving online not because we need to, but because it's just easier. In my life, our family used to go to Target several times a week and now we go maybe once a month. But dozens of trucks stop literally in our driveway every week.

In developing markets, there's a leapfrogging effect going on. And most of these consumers are getting their first computer in the form of a cheap smartphone and there, as you said, there is no Target store a couple miles away. And even if it was, the consumers in this part of the world don't have an SUV. And so they're becoming so-called digital natives. So they're starting as consumers with a smartphone in their hand. And that's what's propelling the growth of the sector to I believe unprecedented growth rates. And I think it's got a long way to go. I mean, for example in India, you still have essentially one billion people that have neither a computer or the internet. But as smartphones get cheaper and cheaper, that's going to change and it is changing quite quickly.

Nate Geraci: You mentioned India, but in terms of country allocation in EMQQ, there's a lot riding on China. Can you perhaps quantify the opportunity in China in particular?

Kevin Carter: Well, China is the biggest economy in the world. It's the biggest mobile smartphone market in the world. China has over 700 million smartphone users today. It's three times the United States. But that's still only about 50% of the country, so there's definitely room for more penetration. And there's also room for more growth and sort of secondary types of services beyond just the search and social networking. China's about two-thirds of EMQQ. It will always be likely the largest weight, because as mentioned, China's the biggest internet market in the world by far and well ahead of places like India.

Nate Geraci: Kevin, as I know you're aware, there's no shortage of ETFs offering broad-based emerging market exposure, VWO, IEMG, SCHE. Do you see EMQQ replacing ETFs like this is a portfolio or is it more complementary?

Kevin Carter: Well, to be frank with you, I've historically said it's sort of a complement, like own it alongside VWO. Take a core/satellite approach using one of the broad ETFs. But I've actually become a little bit more extreme in my belief on this. I mean, as I mentioned, the problem with those broad emerging market ETFs is that they're dominated by Chinese banks and oil companies and things like Petrobras, and they're really not-for-profit businesses. And that's always bothered me, and I guess the more I see Petrobras in the paper, the more ... I guess I finally gave up on that as an approach. I mean, I think in my heart of hearts while I understand that type of an approach, you're investing in emerging markets for growth. I mean, implicit in the word emerging is some sort of growth, and that growth is in consumption, and that's happening on a smartphone. So I, again, have a vested interest in this. But I don't own any of the broad emerging market ETFs and neither does anybody in my family.

Conor Kelly: Kevin, this is Conor Kelly. Correct me if I'm wrong, but another big issue with how a lot of these emerging market, broad emerging market ETFs are constructed, or at least their indexes, is that a lot of these companies you guys own are actually listed in the US on US exchanges because they're backed by, like Nate said, investment dollars in the US. So therefore, they're excluded from inclusion in a lot of these broad-based emerging market ETFs, right?

Kevin Carter: Well, yes. This has been a big problem and one that I spent a lot of time in my life trying to remedy. When I first got involved in emerging markets, and China in particular, I was stunned to learn that Baidu was not in the index. And so the largest China ETFs owned all the Chinese banks and oil companies, but they did not own Baidu. And the reason for that was because, as you mentioned, most of these companies are backed by US venture investors and when it's time for them to go public, they want these companies to list on the best stock exchanges in the world with the most transparency and the highest listing standards - and those are the New York Stock Exchange and the NASDAQ.

And so essentially, because of the choice to take the high road on the listing venue, most of these companies were excluded from the index. Fortunately, the Alibaba IPO got enough attention that even the USA Today and Consumer Reports highlighted the fact that yes, this Alibaba thing is a big thing and it's all over our TVs and the newspaper, but it's not going to be in your ETF. And that noise, coupled with the efforts by people like me, finally got the index providers to change. But it took another couple years for MSCI to add these listings, and it wasn't until September of last year that Vanguard finally added Alibaba and Baidu. So they are now included, but they're still heavily diluted down by all of the state-owned companies that I think are the biggest problem in emerging markets.

Nate Geraci: Kevin, we have about 60 seconds left here. I think it bears mentioning that EMQQ was one of the best performing non-leveraged ETFs in 2017. It was up nearly 70%. I believe it was actually the best performing emerging markets stock ETF. But with that, assets flowed into the ETF. It now has around half a billion dollars invested in it. Obviously, performance has helped tremendously, but I'm curious from your perspective, outside of just performance, what's the recipe for a new ETF to be successful? Because you're living this right now.

Kevin Carter: Yeah, well I think you need to identify something people want to buy, whether it is a theme or a sector that people are naturally going to want. And in the case of EMQQ, the emerging market consumer story was well-documented and well-understood. And it's where I was in deep in the weeds. And what I saw was the same thing I saw happening in my life, which was we weren't going to Target as much and trucks were showing up in our front yard. And I realized that it wouldn't take long for the rest of the investment community to recognize that this great story of growth in emerging markets, the consumer, was going to go the same way ours was going - online as opposed to traditional. Obviously, the performance was good, but I think people, every day, every quarter people see how this secular shift is playing out in their own lives and in the lives of the businesses that are winning and losing.

Nate Geraci: Well, Kevin, with that, we'll have to leave it there. Congratulations on all the success with EMQQ. As always, we appreciate your time today. Thank you.

Kevin Carter: Thank you.

Nate Geraci: That was Kevin Carter, Founder of EMQQ. Again the ETF is the Emerging Markets Internet and E-Commerce ETF and you can learn more about this ETF by visiting emqqetf.com.