To help make that sale, Emerging Global Advisors draws from its portfolio of 22 ETFs targeting emerging markets with core, sector or thematic focuses — all based on its own investment philosophies.
The ETF products, called EGShares, do not adhere to capitalization-weighted benchmarks such as the FTSE Emerging Index or the MSCI Emerging Markets Index. Instead, Emerging Global Advisors actively helps design the indexes it uses for its products. Following this approach, the thinking goes, helps get away from the emphasis on developed markets and certain sectors such as financials, energy and materials, where ETFs based on the traditional benchmarks tend to sway.
When marketing its products, Emerging Global Advisors also works to educate would be customers about the opportunity in thinly traded ETFs. As new ETFs emerge, they have no volume or trading history. Without trading about $1 million per day, Holderith says as an example, financial advisors might not think the fund has enough liquidity to invest. But what those advisors should really be focusing on, Holderith argues, is the liquidity of the underlying companies that comprise the fund, and the potential investment opportunity.
"The single most important piece of the ability to trade a thinly traded ETF is to know who to call, who your trading resource is, internally, at your firm," Holderith says.
Emerging Global Advisors' largest fund, the Emerging Markets Consumer (ECON), had $787.22 million in assets as of press time. The fund is an example of the firm's strategy for creating new products by listening to the problems articulated in the market, Hoekstra says. It aims to offer more exposure to consumer growth in multiple emerging markets countries, rather than focusing on the energy and financial sectors.
"A lot of their holdings are the beverage companies, the brewers, the food companies - all of which will benefit from a growing middle class in emerging market countries," says Patricia Oey, a senior analyst who specializes in passive fund research at Morningstar. "That fund has some high-quality companies, as many of these firms tend to be the dominant player in their local markets or regional markets."
The fund's closest competitor, she explains, is the iShares MSCI Emerging Markets Consumer Discretionary ETF, or EMDI, which has a different emphasis. "EMDI has a heavy 30% weighting in South Korean companies, many of which are exporters such as Hyundai Motor, and are therefore more exposed to global growth trends," Oey says.
Another ETF that Emerging Global Advisors counts among its best-performing funds is the Low Volatility Emerging Markets Dividend (HILO), with $87.45 million in assets as of press time. True to its name, the fund targets emerging market stocks that are less volatile, for financial advisors and investors who want to raise their emerging markets allocation but with less volatility.
Emerging Global Advisors' products also includes several new funds launched in the second half of last year. That includes Beyond BRICS (BBRC), aimed at developing countries beyond the usual suspects (Brazil, Russia, India and China); Emerging Markets Domestic Demand (EMDD), which targets five sectors the firm has deemed as most poised for organic growth (consumer discretionary, consumer staples, health care, telecom and utilities); and Emerging Markets Core (EMCR), which follows the S&P Emerging Markets Core Index and aims to incorporate less mature investments than traditional emerging markets benchmarks.
The products are aimed not only at letting financial advisors help clients diversify their emerging markets exposure, but also helping change the conversations about investing in those regions.
"Right now, if you're an advisor that says, 'Your [emerging markets] portfolio yields 2%, maybe you want more of a total return to come from yield or income' — nobody is saying that to [the client], and so you're differentiated," Hoekstra says. "Or, said differently, 'Your [emerging markets] portfolio contains only 12% consumer exposure. Have you thought about raising that by half?' No one has said that to them."
Transitioning to ETFs
One Emerging Global client, Morgan Stanley Wealth Management financial advisor David Beyer, uses mobile phones as an example to talk about emerging markets growth. He has an office phone, a fax machine and a BlackBerry with him at his office, and then at home he also has another two phone lines and fax machine. In China, however, he says there is one mobile phone for every seven people.
"I think the growth is really outside the United States, in terms of people who don't have cell phone lines," Beyer says.
Beyer, who practices together with financial advisor Mitchell Stein in New York City, the Beyer Stein Group, say that those kinds of examples help their high-net-worth and ultra high-net-worth clients see the investment opportunity in emerging markets, despite the volatility risk.