Some EM Sector ETFs Could Soar in 2013

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Well-documented was the rise of diversified emerging markets ETFs in 2012. Multi-country funds such as the iShares MSCI Emerging Markets Indx (NYSEARCA:EEM) and the WisdomTree Emerging Markets Eqty Incm Fd (NYSEARCA:DEM) delivered solid returns while attracting a steady stream of new assets from investors.

iShares Dow Jones US Home Const. (ETF) (NYSEARCA:ITB)

Country-specific funds such as the those tracking the Philippines and Turkey got in on the act as well, delivering jaw-dropping returns.

Just a few trading days into 2013, emerging markets ETFs are extending their 2012 gains as EEM and DEM are in the green and some country funds such as the Market Vectors Vietnam (NYSEARCA:VNM) have already set a torrid pace.

Amidst all the ebullience, emerging markets sector ETFs can go overlooked. Ignoring these sector funds in 2013 could prove to be a mistake because some have already outperformed traditional diversified and country-specific developing markets ETFs. With that in mind, consider the following ETFs as the among the best bets at sector level in the developing world this year.

EGA Emerging Global Shares Trust (NYSEARCA:EMDD) The EGShares Emerging Markets Domestic Demand ETF is more of a thematic concept than a sector-specific play. That theme, as EMDD's name implies, is a goal of a plethora emerging markets, both large and small: Increased domestic consumption.

While rapidly rising export numbers can be seductive, a heavy dependence on exports exposes any country to the economic woes of its trading partners. Just ask Australia, Brazil and on and on. Is it possible for a developing economy to be focused on domestic consumption while growing in size? The answer is yes. Just look at Indonesia, Southeast Asia's largest economy, where domestic consumption represents 60 percent of GDP.

Regarding EMDD, the ETF is one way of avoiding a misguided approach to tapping into the emerging markets consumer theme. That being the flawed thinking that Western multinationals are the way to play rising middle classes in the developing world. In reality, many emerging markets consumers prefer the brands they have known their whole lives.

At the sector level, EMDD is fairly conservative as the fund is heavy on food and beverage and telecommunications names. EMDD does offer a direct avenue to the expected vibrancy of Asia's local demand story over the coming years. India and China combine for over 30 percent of the fund's weight. EMDD also features smaller allocations to Indonesia, Malaysia, Thailand and the Philippines. EMDD has returned 12.3 percent over the past six months.

Global X China Consumer (NYSEARCA:CHIQ) In early October 2012, the Global X China Consumer ETF was identified as one China fund beyond the usual suspects that could benefit from a rebounding Chinese economy and government stimulus efforts. Since then, CHIQ has jumped 13.6 percent.

With retail and food names combing for over 41 percent of CHIQ's weight, the ETF is heavily exposed to Chinese consumers' everyday needs. Being exposed to the Chinese consumer at all is not such a bad thing, particularly for patient investors.

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