Monthly Archives: September 2014

ETF Parse – Emerging Markets

Comparative Analysis: Select Emerging Market Exchange Traded Funds in Argentina, Russia, India, Mexico, Brazil, and Indonesia


For as long as I can remember, I’ve been fascinated with the concept of emegring markets in the developing world for two primary reasons. The first is that innovation in these countries generally necessitates low-cost solutions. Second, I’m encouraged by the concept of the second mover advantage. The first mover stomachs the cost of innovation while the second mover plays the game of catch up. This is what we’ve seen by way of China and India. By way of innovation in an absolute sense; these countries may not be at the forefront, but at least a goal is achieved, which exists by way of improved standards of living in these countries.

Over the course of the next few months, I am looking to track markets in Indonesia, Argentina, and India. Russia and Mexico will be at the tertiary nodes of my observations.

This evening, I’ve chosen to highlight several factors to begin my analysis. I chose to underscore market volatility (by observing ETF beta), alongside the # of positions held in various equities, relative to the market value of all positions held.

  • Market volatility: beta is used to represent an index/equity’s correlation with the broader market. Within our sample set, we look at the average beta of all positions held by an ETF relative to a regional specific benchmark. Values below 1 imply that on average, equities within an index will suffer less from volatility in the market relative to the aggregate benchmark. 1 implies perfect correlation. Values exceeding 1 imply that the equities generally are susceptible to exaggerated swings relative to general market movements. Not surprisingly, the Latin American equities observed here are relatively volatile equities. This is a common trend amongst countries in the emerging market – capital from opportunistic investors flies in from abroad when times are good; and just as easily as the capital flies in, it just as quickly flies out. I believe that the low levels of volatility in India and Indonesia derive from lack of investor appetite in those markets, primarily because foreign investors are not very acclimated with delving in to the region on a general basis.
  • Number of positions held: I selected this metric primarily because it is an indicator of regional diversity across different industries. The fewer positions held by a given ETF implies that a country is susceptible to a concentrated few companies, which represents significant risk (if a Company performs poorly, for a variety of reasons, it is possible for the Country as a whole to suffer as well). In future iterations of my analysis, i look to sophisticate my analysis by including information that breaks down holdings on a sector specific basis, alongside expected returns within those industries. I am particularly eager to observe Argentina’s energy & industrials boom, given recent positive developments and discovery of resources in the region.
  • Market value: perhaps is the most obvious point of analysis. It makes sense that Brazil is exponentially larger than its peers. I chose to include this to highlight that emerging economies cannot be basket. Some markets are more sophisticated than others.

I’ve included a draft, for purpose of my personal notes below. Within each ETF, I will look to compare revenue growth relative to recorded revenue values of different companies, also highlighting market sizing.

Draft ETF analysis: Argentina


FedEx FQ1 Earnings

FedEx is up 3% following FQ1 earnings (revenue up 6% yoy; operating income up 24% yoy; operating margin expansion up 130 bps yoy; net income up 24% yoy).


Growth was spurred by strong performance by the FedEx Ground business unit, volume and revenue increases by the freight line, and surges in U.S. domestic volume at FedEx Express.

Logistics is an inelastic service, and I am long on FedEx in the long term because FedEx is the prime benificiary of  the consumer shift to digital commerce.

Short Term Catalysts

  • The US domestic economy is upbeat and consumer confidence will continue to drive volume and earnings through CQ4 2014
  • The Alibaba IPO will continue to publicize online buying; further spurring the popularity of ecommerce

Long Term Drivers

  • FedEx Home Delivery has partnered with Amazon to handle weekend package deliveries. This could prompt a longer term partnership. Key trends in ecommerce include expedited delivery (the next frontier includes same day delivery). While ecommerce giants may plan to execute these orders and shipments themselves, it seems impossibility for these companies to vertically integrate a logistics business. FedEx is poised to be a key partner with US ecommerce companies
  • Relative to its competitors, FedEx operates with a leaner corporate structure. Its FedEx Ground business unit devolves responsibility on a contract basis (vs employee basis). Within each terminal, operating routes are divided and controlled by owner operators, lessening the need for corporate bureaucracy
  • Employees are non-unionized, eliminating the potential for strikes (which have hurt competitors like UPS in the past)

Adobe CQ3 Earnings

Adobe fell 4.7% in after hours trading following its Q3 earnings call. The Company was punished primarily for missing growth estimates related to sales & customer acquisition ($1.01b revenue; $0.28 eps; 502k new subscribers vs. consensus estimates of $1.02b revenue; $0.26 non-gaap eps; 503k new customers).

adobe post market

Closing  just shy of its 50 day moving average ($71.26, $70.73, respectively), Adobe inched closer to its 200 day moving average ($65.56), in after hours trading, closing at $67.45 at 8PM EST.


Making the transition from single purchase sales structures to recurring revenue subscription models has proven difficult for many technology companies. Investors are unsure how to react to tech sector fundamentals, and these companies suffer when classic fundamentals, such as revenue growth, are reported below expectations.

Adobe is in the midst of its migration to a cloud based subscription business, and I recognize these hiccups in valuation as a prime opportunity to take a position with Adobe, and feel bullish on the stock in the long term.

  • Customer acquisition growth has declined, but mostly because “loyal” subscribers have already made the leap from the one-time purchase model to the cloud subscription model. Adobe ventures in to new territory by tackling the SMB and other consumers and represents a high growth opportunity
  • Meanwhile, revenue will not increase as quickly as anticipated while Adobe takes on the challenge of acquiring new subscribers; however, new subscribers represent a stronger recurring revenue base in the longer term
  • Adobe represents the standard in creative computing. Competitors have tried, and failed to compete with its Creative Suite. The cloud will increase the ease of accessing Adobe’s products and will likely create an incentive for individual consumers to purchase, rather than pirate, Adobe products
  • Lastly, Adobe’s gross margins represent significant room for improvement on a relative basis. As the Company continues to convert customers to its subscription model, margin improvements will be a key metric of analysis during future earnings calls

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