Advertisement

Two funds to profit from Asia's love for smartphones

HanETF’s exchange-traded fund allows you to buy into a “mega trend” - the surging demand for smartphones in Asia.

917_MW_P22_Funds
A fund that lets you capture a mega trend

Thematic funds have become increasingly popular in the past few years. Back in the mists of time, investors tended to buy a fund based on a combination of sector, geography or company size. This usually meant investing in UK small caps, for instance, or European blue chips. In our increasingly connected, globalised world, however, investors have become more interested in major themes or "mega trends", such as an ageing society.

Advertisement - Article continues below

US fund manager Motif Investing has built a solid franchise around private investors picking a theme or idea, which is then populated automatically with the appropriate stocks. Exchange-traded fund (ETF) providers are also scrambling to provide thematic funds. L&G ETFs has traditionally played a big role in the thematic space through index funds that track everything from robotics stocks to the battery industry. Transatlantic giant BlackRock iShares has also jumped on this bandwagon, and boasts ETFs focused on robotics and digitalisation.

New face on the market

Yet these big providers are about to face competition from a new outfit called HanETF, which launched its first ETF at the end of September. Over the next few weeks, it will launch a range of additional technology-based ETFs, but this first fund, the EMQQ Emerging Markets Internet & Ecommerce ETF, (LSE: EMQQ) is fairly self-explanatory. Countries in its universe include China, India, Russia, Brazil and Nigeria, while firms must generate more than half their revenue in emerging markets (EMs) to be considered. This means the index could include both US-listed firms that operate in EMs, plus locally listed EM tech firms. That's an important distinction outfits such as Alibaba don't end up inside many EM ETFs because the Chinese giant is listed on the New York stock exchange, and thus does not qualify for inclusion in EM indices.

Invest in smartphone demand

The driver behind the launch of this thematic ETF is obvious: surging demand from EM consumers, and especially smartphone users in places such as China and India. According to some reports, by 2025 the EM consuming class will swell to 4.2 billion, with more than 2 billion smartphone users. Consumption in EMs will account for $30trn nearly half the global total. Looking at data from the US version of this ETF, the revenue of the companies included in EMQQ grew from $13bn in 2009 to $73.8bn in 2014 a total five-year growth of 468% and an average annual growth rate of 41.5%.

Advertisement - Article continues below

There are currently 89 stocks in the index, with the biggest holdings including tech giant Tencent at 7.58%, Alibaba at 7.37%, media group Naspers at 7.26%, and Baidu (China's Google) at 6.75%.

As you'd expect from such a momentum-driven collection of stocks, valuations are a tad toppy the price to earnings ratio averages just under 50. This is so high because these stocks have shot up in value. Over the past five years, the index has returned an average annualised return of 14%. But it's not all good news over the past year investors worried about China's tech sector have sold their holdings, prompting the index to lose 5%.

In short, this is a classic thematic momentum fund. The annual charge is 0.89%, against 0.6% for rival ETF-provider iShares' own EM Consumer Growth fund (LSE: CEMG). However, the iShares fund includes developed-world stocks such as Diageo and Unilever, which both have big EM operations. I like the fact that the HanETF vehicle is a much more targeted fund with a specific theme, and thus a great way to play the China/Asia smartphone growth story. Saying that, whether now is the right time to buy such an exciting basket of stocks is a very personal decision.

Advertisement
Advertisement

Recommended

When ETFs can’t work miracles
Analysis

When ETFs can’t work miracles

Bond ETFs can be cheap and liquid, but tracking high-yield debt is more difficult than tracking stocks.
20 Jan 2020
Could the Covid crisis hold a silver lining for cheap value stocks?
Value investing

Could the Covid crisis hold a silver lining for cheap value stocks?

Value investing strategies have had a dreadful six months – but the crisis could be a catalyst for them to turn around.
20 Jul 2020
Singapore's economy will bounce back
Asian economy

Singapore's economy will bounce back

Singapore has been battered by the collapse of global trade, and its main stockmarket index has lost a fifth this year. But analysts are feeling posit…
17 Jul 2020
India's stockmarket rally runs out of steam
Emerging markets

India's stockmarket rally runs out of steam

India's BSE Sensex index fell early this week, and the country's economic outlook is shaky.
17 Jul 2020

Most Popular

BP has slashed its dividend – and markets love it
Income investing

BP has slashed its dividend – and markets love it

BP has bowed to the inevitable and cut its dividend in half – and its share price promptly rose. John Stepek explains what it means for shareholders …
4 Aug 2020
Listed companies are dying out, and that could have serious consequences
Stockmarkets

Listed companies are dying out, and that could have serious consequences

Private equity is taking over from public stockmarkets as the biggest provider of capital to companies. That’s bad for investors and bad for society a…
3 Aug 2020
Gold hits the big $2,000 level – are Aim miners about to play catch up?
Gold

Gold hits the big $2,000 level – are Aim miners about to play catch up?

With the price of gold shooting through $2,000 an ounce, the yellow metal looks unstoppable. Things are so bullish, even Aim-listed junior gold miners…
5 Aug 2020