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Small-Cap ETFs for Emerging Market Exposure


Broad emerging market exchange traded funds have not been moving as quickly as in previous years, but the small-cap segment in the developing world has stood out, providing investors diversification and access to the growth in domestic consumption.

The WisdomTree Emerging Markets SmallCap Dividend Fund (DGS) has gained 4.5% year-to-date and the SPDR S&P Emerging Markets Small Cap ETF (EWX) rose 5.1%. Meanwhile, the Vanguard FTSE Emerging Markets ETF (VWO) dropped 4.8% year-to-date and iShares MSCI Emerging Markets Index Fund (EEM) is down 5.4%. [Options Traders Betting Against Emerging Market ETFs with Puts]

“We’re in an environment this year, year to date, where the small caps in emerging markets are outperforming the large caps in emerging markets by about 700 basis points,” WisdomTree Chief Investment Strategist Luciano Siracusano said on CNBC. “But something is happening in emerging markets. It’s a trend we’ve seen over the last three, five and 10 years, so I think it’s definitely an asset class investors should be looking at.”

VWO and EEM are both primarily comprised of mega- and large-cap stocks. VWO has 47.4% in giant-caps, 41.0% in large-caps and 10.7% in mid-caps. EEM has 46.8% in giant-caps, 40.8% in large-caps and 12.0% in mid-caps. [Emerging Market ETFs Test Long-Term Trends and Support]

“The large caps are tied to the global economy, particularly what’s happening in Europe and of course what’s happening in China,” Siracusano said. “I think the small caps have more exposure to what’s going on on ground in their countries, and those countries are still growing.”

Specifically, small-cap emerging market stocks focus more toward domestic consumption and the emerging middle-class in the developing world.

“Small-cap focus provides better diversification benefits relative to large caps, as small companies tend to have more exposure to local economies and customers,” according to Morningstar analyst Patricia Oey.

“Investors want to get closer to the emerging consumer, I think emerging small caps give them that option and make them less vulnerable to slowdowns in the global GDP,” Siracusano added.

For more information on the developing economies, visit our emerging markets category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.