KB - ADRE: Emerging Market Fund Betting High On Technology Driven Companies

Summary

• ADRE’s portfolio has ADRs of large-cap companies from the financial sector in India and South Korea, ICT sector in India/Taiwan, and from technology focused consumer discretionary businesses in China.
• Core portfolio of ADRE had a satisfactory performance during the past three months. It also generated a strong average annual total return over the long run.
• Economies of China, India, Taiwan and South Korea have strong growth potential and as long as they grow, the underlying sectors are going to benefit.

~ by Snehasish Chaudhuri, MBA (Finance)

The Invesco BLDRS Emerging Markets 50 ADR Index Fund ( ADRE ) is an exchange-traded fund ((ETF)) that invests in American Depository Receipts (ADRs) of companies that are based out of four of the largest and fastest growing credible emerging economies - China, Taiwan, South Korea and India. ADRE has an expense ratio of 0.3 percent and an asset under management ((AUM)) of $130 million. The fund pays quarterly dividends and generates low but decent yield. During the period 2016 to 2021, ADRE generated an annual average total return of almost 12 percent. The fund is priced around $40 and is trading at a marginal discount of 0.23 percent to its net asset value ((NAV)).

ADRE is an Emerging Market ADR Fund Fully Replicating BKTEM

Invesco BLDRS Emerging Markets 50 ADR Index Fund was launched by Invesco Ltd. and is managed by Invesco Capital Management LLC. The fund seeks to track the performance of the S&P/BNY Mellon Emerging 50 ADR Index, by using full replication techniques. According to seekingalpha.com website, “The index is developed by the Licensor from a universe of Depositary Receipts defined by the S&P/Bank of New York Mellon ADR Index ("S&P/BNY Mellon ADR Composite Index"). The fund normally holds at least 95% of its total assets in Depositary Receipts that comprise the index, and will seek to track the investment results, before fees and expenses, of the index.”

ADRs are negotiable certificates issued by U.S. depositary banks that usually represent one equity share of a foreign company. These certificates are priced and traded in dollars and cleared through U.S. settlement systems. ADRs are listed on either the New York Stock Exchange (NYSE) or the Nasdaq ( NDAQ ), but they are also sold over-the-counter ((OTC)). ADRs trade in the same way stocks of domestic companies do. So, ADRs let U.S. investors purchase stock in overseas companies that would not otherwise be available to them. Foreign firms also benefit through issuance of ADRs, as it enables them to attract American investors without being listed on U.S. stock exchanges.

78 percent of ADRE’s assets are invested in companies from China, Taiwan, India and South Korea. Not surprisingly, almost 80 percent of investments are made in three sectors - information and communication technology ((ICT)), financial services, and technology driven consumer discretionary businesses. Chinese, Taiwanese, and Indian economies are some of the biggest beneficiaries of the growth of technology-driven businesses. And being among the largest and fastest growing emerging markets, the consumer discretionary and financial sectors are reaping up the gains. More importantly all these countries have their sovereign bonds rated as investment grade.

Composition and Performance of Core Portfolio of ADRs from ADRE

Investments in the information technology ((IT)) sector were made only in the ADRs of Indian and Taiwanese companies - two pioneering markets for IT. The list included Taiwan Semiconductor Manufacturing Co. Ltd. ( TSM ), Chunghwa Telecom Company, Ltd. ( CHT ), ASE Technology Holding Co. Ltd. ( ASX ), United Microelectronics Corp. ( UMC ), Infosys Ltd. ( INFY ), and Wipro Ltd. ( WIT ). Invesco BLDRS Emerging Markets 50 ADR Index Fund made significant investments in ADRs of financial entities from India and South Korea. ADRE invested in HDFC Bank Ltd. ( HDB ), ICICI Bank Ltd. ( IBN ), KB Financial Group Inc. ( KB ), Shinhan Financial Group Co. Ltd. and ( SHG ), and Woori Financial Group Inc. ( WF ).

When it comes to Chinese firms, within the communication services and consumer discretionary sector, a significant proportion of investments are made in ADRs of technology-oriented businesses like e-commerce, online tourism & education, electric vehicles, etc. Examples include Alibaba Group Holding Ltd. ( BABA ), JD.com Inc. ( JD ), Baidu Inc. ( BIDU ), NetEase Inc. ( NTES ), Pinduoduo Inc. ( PDD ), Trip.com Group Ltd. ( TCOM ), NIO Inc. ( NIO ), and New Oriental Education & Technology Group Inc. ( EDU ). An interesting investment within the portfolio of ADRE is Vale SA ( VALE ), a Brazil based multinational corporation that is completely dependent on China. Iron ore made up nearly 85 percent of Vale's revenues in 2021, and China accounted for 64 percent of Vale's iron ore shipments in 2021, and 52 percent of the company's revenues.

These above-mentioned 20 ADRs account for 77 percent of ADRE’s total investments. So, it’s quite clear what will drive the growth of Invesco BLDRS Emerging Markets 50 ADR Index Fund in the coming years - the performance of the financial sector in India and South Korea, ICT sector in India and Taiwan and technology focused consumer discretionary businesses from China. 12 out of these 20 ADRs - EDU, TCOM, PDD, VALE, WF, HDB, KB, SHG, BABA, UMC, INFY, JD - recorded positive price growth during the past three months. Barring JD, all other ADRs grew by more than 8 percent. On the other hand, the price of only one ADR ((NIO)) fell by more than 8 percent during the same period. So, overall, the core portfolio of ADRE had a satisfactory performance during the past 3 months. Meanwhile, the price of ADRE grew by 2.14 percent.

Testing My "7 Factor Model for Evaluating Emerging Market Funds" on ADRE

Invesco BLDRS Emerging Markets 50 ADR Index Fund generated a low but decent yield. It has a high AUM and is trading around $40, which is at par with its NAV. The core portfolio of ADRE also had a satisfactory performance during the past 3 months. Average annual total return also is quite high. Its portfolio boasted of ADRs of large-cap stocks from the financial sector in India and South Korea, from ICT sector in India and Taiwan, and from technology driven consumer discretionary businesses from China. The fund does invest around 11 percent of its assets in materials. However, the lack of diversification into healthcare, industrial, consumer staples, energy, utilities, real estate, etc. makes this fund a little riskier. Also, despite being an emerging market fund, it is highly concentrated only on five markets, including Brazil.

Going forward, economic growth of these four countries - China, Taiwan, India and South Korea - will be the prime driver behind the growth of this fund. All these economies are having strong growth potential in the long run, and as long as they grow, the underlying sectors are going to reap the benefits. As a result, I expect this fund to sustain its current level of yield and also generate strong capital gains over the long run. Default risk of ADRE is also quite low due to its investments in ADRs of large-cap companies from nations that have investment grade sovereign bonds. Its investment strategy is most likely to suit growth seeking investors. In my opinion, under current circumstances, Invesco BLDRS Emerging Markets 50 ADR Index Fund is an attractive option.

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