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5 Small-Cap ETFs for Emerging Markets Exposure

Todd Shriber

Small-cap stocks can be exciting parts of the broader equity market — not just domestically but on an international basis, too. It can also be difficult to stock pick among smaller companies and that is also true of ex-U.S. small-caps, particularly small emerging markets stocks.

Some exchange-traded funds (ETFs) offer investors exposure to the potentially lucrative world of emerging-markets small-caps while easing the stock selection burden in this asset class. Small-cap emerging-markets ETFs also offer nice diversifiers away from large-cap funds in this category, many of which are highly concentrated at the geographic or sector levels or both.

Additionally, small-caps in developing economies usually sport more attractive valuations relative to their U.S. counterparts, and some emerging-markets small-cap ETFs can even be less volatile than domestic equivalents. Consider the following five ETFs for exposure to smaller stocks in developing economies.

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Small-Cap ETFs: WisdomTree Emerging Markets SmallCap Dividend Fund (DGS)

Small-Cap ETFs: WisdomTree Emerging Markets SmallCap Dividend Fund (DGS)

Expense ratio: 0.63% per year, or $63 on a $10,000 investment.

Good news: investors can get compensated for embracing smaller emerging-markets stocks. The WisdomTree Emerging Markets SmallCap Dividend Fund (NYSEARCA:DGS) tracks a dividend-weighted index that yields nearly 4.1%, or more than triple the equivalent yield on the widely followed Russell 2000 Index.

DGS allocates almost a quarter of its weight to Taiwan and 17.16% to China, which is a significant underweight relative to the China weight found in most large-cap emerging markets funds. Overall, DGS features exposure to 19 countries, 10 of which are Asian economies.

As a small-cap ETF, DGS also helps investors dodge the hefty financial services allocations found in large-cap emerging markets funds. That sector represents just 12.19% of the DGS sector lineup. Rather, this emerging-markets small-cap fund offers income with a growth kicker with a combined 32% weight to technology and consumer discretionary stocks. Even with that, DGS has historically been less volatile than domestic small-cap benchmarks.


Small-Cap ETFs: SPDR S&P Emerging Markets Small Cap ETF (EWX)

Small-Cap ETFs: SPDR S&P Emerging Markets Small Cap ETF (EWX)

Expense ratio: 0.65%

The SPDR S&P Emerging Markets Small Cap ETF (NYSEARCA:EWX) turns 10 years old in a few days. This emerging-markets small-cap fund strictly adheres to the definition of small-cap by limiting its holdings’ market values to $2 billion. The weighted average market value of EWX’s 1,063 holdings is $1.38 billion.

Geographically speaking, EWX is more expansive than the aforementioned DGS as the SPDR offering features exposure to 27 countries. EWX devotes about 45% of its combined weight to Taiwan and China, in large part explaining the ETF’s nearly 21% weight to technology stocks.

Over the past three years, EWX has outpaced the MSCI Emerging Markets Index by 110 basis points while being 240 basis points less volatile.


Small-Cap ETFs: iShares MSCI Emerging Markets Small-Cap ETF (EEMS)

Small-Cap ETFs: iShares MSCI Emerging Markets Small-Cap ETF (EEMS)

Expense ratio: 0.69%

The iShares MSCI Emerging Markets Small-Cap ETF (NYSEARCA:EEMS) follows the MSCI Emerging Markets Small Cap Index, the small-cap answer to the MSCI Emerging Markets Index. Of the ETFs I’ve highlighted to this point, EEMS has the largest China weight at 20.41% and because MSCI classifies South Korea as a developing market, EEMS devotes 17.12% of its weight to small-caps in Asia’s fourth-largest economy. China, South Korea and Taiwan combine for about 54% of this ETF’s weight.

EEMS compares well with DGS and EWX in terms of sector exposure as the iShares offering devotes about a third of its combined weight to consumer discretionary and tech stocks with just 9.14% going to financials.

Based on a price-to-earnings ratio of just 14.25 and a three-year standard deviation of just 15.09%, EEMS compares favorably with domestic small-cap ETFs.


Small-Cap ETFs: First Trust Emerging Markets Small Cap AlphaDEX Fund (FEMS)

Small-Cap ETFs: First Trust Emerging Markets Small Cap AlphaDEX Fund (FEMS)

Expense ratio: 0.8%

The First Trust Emerging Markets Small Cap AlphaDEX Fund (NASDAQ:FEMS) is a truly smart beta spin on smaller emerging-markets stocks. FEMS tracks the NASDAQ AlphaDEX Emerging Markets Small Cap Index.

“To construct the Index, Nasdaq ranks the eligible stocks on growth factors including 3-, 6- and 12- month price appreciation, sales to price and one year sales growth, and separately on value factors including book value to price, cash flow to price and return on assets,” according to First Trust. “All stocks are ranked on the sum of ranks for the growth factors and, separately, all stocks are ranked on the sum of ranks for the value factors. A stock must have data for all growth and/or value factors to receive a rank for that style.”

FEMS devotes 39% of its combined weight to Taiwan and China, but its overweight (relative to the other funds mentioned here) positions in the likes of Turkey and Egypt can spark increased volatility. Indeed, FEMS offers the best three-year returns of the funds highlighted here to this points, but it has also been the most volatile by a wide margin and is easily the most expensive.


Small-Cap ETFs: Xtrackers Harvest CSI 500 China A-Shares Small Cap ETF (ASHS)

Small-Cap ETFs: Xtrackers Harvest CSI 500 China A-Shares Small Cap ETF (ASHS)

Source: Shutterstock

Expense ratio: 0.65%

Some investors may want to consider tactical, single-country exposure to emerging markets, and there are several ETFs that do just that. One to acknowledge is the Xtrackers Harvest CSI 500 China A-Shares Small Cap ETF (NYSEARCA:ASHS).

For years, A-shares, the stocks trading on Mainland China, were hard to access for foreign investors, making small-caps in this group nearly impossible to get ahold of. China’s efforts to liberalize its financial markets have increased A-shares accessibility, but small-caps can still be tricky to navigate here. ASHS helps with that mission.

Underscoring the expansive nature of China’s mainland equity market, ASHS holds over 520 stocks. As a small-cap ETF, ASHS features barely any exposure to state-owned enterprises or slow-growing sectors such as energy, financials and utilities. Rather, ASHS taps into cyclical growth opportunities via the industrial and technology as well as the Chinese consumer boom with a combined 20% weight to the two consumer sectors.

Todd Shriber does not own any of the aforementioned securities.

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