The founder of an ETF trouncing 99% of competitors explains how industry pioneer Burton Malkiel taught him how to invest in emerging markets — and shares 5 stock picks he loves right now

  • Kevin Carter is the founder and chief investment officer of the Emerging Markets Internet & E-commerce ETF (EMQQ), which has returned 57% year-to-date and is beating 99% of its category peers, according to Morningstar data. 
  • Carter, who co-founded Active Index Advisors with Princeton Economist Dr. Burton Malkiel, recounted how he was introduced to emerging markets investing by the indexing pioneer and author of "A Random Walk Down Wall Street."
  • He also shared the top five emerging markets stocks he'd pick for his own portfolio right now. 
  • Visit Business Insider's homepage for more stories.

Kevin Carter's first exposure to emerging markets investing was not during a trip overseas but on Google's Mountain View campus in California. 

Carter, who co-founded direct indexing company Active Index Advisors with Princeton economist Burton Malkiel in 2002, had just taken on some Google engineers as clients after its initial public offering in August 2004.

Meanwhile, Malkiel was going back and forth between the US and China. He had recently co-authored a white paper on investment strategies to exploit the economic growth in China. 

The Google engineers caught wind of Malkiel's latest work and invited both of them for a talk. 

"On April 19, 2005. Burton and I drove down to Mountain View in the morning and Burton gave a talk about investing in China," Carter recalled. "And all these guys at Google looked at me and said we want to invest in China after the talk."

He added: "Pretty much from the moment that talk ended until today, my entire investment and professional life have been focused on what does that even mean to invest in China and how on earth would you do that."

Fifteen years later, it appears that Carter has figured it out.

The birth of EMQQ

Today, Carter is the founder and chief investment officer of the $1.1 billion Emerging Markets Internet and Ecommerce ETF (EMQQ), which has returned 57% year-to-date and is ranked in the 1st percentile of all 804 funds in the category, according to Morningstar data. 

Carter attributes the outperformance of the passive index-based ETF to two main attributes every investor should know about emerging markets. 

One is the rapidly growing population and consumption in emerging markets.

"85% of the world's people are in emerging markets and 90% of the young people under the age of 30 are in emerging markets, and their economies are growing faster," he explained.

"So the people are moving on up and they want stuff. They want more and better food, more and better clothing, appliances, entertainment, vacations, cars, and they want their kids to go to Harvard."

The other thing is what Carter believes to be "a real problem with traditional emerging markets ETFs," which often track indices that include government-owned banks and oil companies. 

"They dominate the indices, they are not really for profit, and they have a lot of corruption," he said of these state-owned enterprises. 

The two catalysts that set Carter off to build EMQQ are exactly what he focused on when deciding on the rules-based, market-cap-weighted index, which currently tracks 83 internet and e-commerce companies in the emerging and frontier markets. 

Five outperforming EM stocks you've (probably) never heard of

As the CIO of a passive ETF, Carter nevertheless defines himself as a "Warren Buffett/Charlie Munger stock-picking person by nature."

He shared with Business Insider the top 5 emerging market stocks that he'd pick for his portfolio right now. 

Chinese e-commerce players Pinduoduo (PDD) and JD.com (JD) are both on Carter's radar. 

Pinduoduo, which allows consumers to group purchase items at a discount, captures the Chinese consumers living in third- or fourth-tier cities while offering a "gamification of the e-commerce experience."

"It's a mash-up of Costco meets Disneyland," he said of interactive e-commerce features. "The growth rates in those third- and fourth-tier cities have also been a lot higher than in the more developed cities."

On the other hand, JD.com is giving Chinese consumers an Amazon-like experience. 

"They've got their own trucks and their own massive automated warehouses for moving goods around," he said. "I'm speculating but it seems to me that JD might also end up being the largest drone operator in the world. They've got a vertically integrated model from the app to the truck and that's an advantage."

Brazilian fintech firm Stone (STNE), which counts Warren Buffet's Berkshire Hathaway as a shareholder, is another stock in which Carter sees a lot of upside. 

"This fintech part of the story is the Trojan horse," he said. "You can get in with payments and get the money on the phone. And then once you have the money, then you can sell insurance, credit, and wealth management products."

Carter also owns the Nigeria-born, now Berlin-based Jumia Technologies (JMIA). 

"That's been a controversial company but I was able to buy it for about half the IPO price after it got shot down by a short-seller," he said, referring to when short-seller Citron Research called the firm "an obvious fraud" in May 2019.

Citron Research has since reversed its opinions on the stock and is now long the stock, citing that the pandemic has changed e-commerce globally, according to the Africa Report. 

Also on Carter's list is high-flying Singaporean internet and e-commerce company Sea (SE), whose stock has shot up 326% this year. 

"This is a combination of businesses. It's got shopping, it's got payments, it's got gaming," he said. "And this was the best performing large-cap stock in the world at one point, according to Bloomberg."

Short-term trade or long-term story

EMQQ has generated envious returns this year, but questions still remain as to whether it can sustain that outperformance for the long-term. To be sure, the fund was down 29.82% in 2018. 

"EMQQ is benefitting from growing internet usage in emerging markets and the stay-at-home reality of the Covid-19 pandemic," said Todd Rosenbluth, head of ETF & mutual fund research at CFRA.

"While we think the long-term thematic trend of growing e-commerce in emerging markets will persist, we think replicating such relative performance success in 2021 will be a challenge," he added. 

As for Malkiel who sits on the EMQQ index committee, he is placing bets on the long-term story. 

"I think it's a marvelous thing to own and I put my money where my mouth is," he said in an interview. "We have little accounts for my three grandchildren and I have bought them EMQQ."

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