Emerging Markets Small-Cap ETFs For The Second Half

Just when it looked safe to embrace emerging markets ETFs once again, Italy and Spain, two developed markets, have raced to the forefront of Europe's sovereign debt woes, plaguing global equity markets, developed and emerging alike. Hope is not an efficacious investing theory, but that may be all the market has at this juncture: The hope that Italy and Spain do not need Greece-esque bailouts. Assuming that is the case and European headline risk diminishes, the third quarter could bring the start of a legitimate rally for emerging markets ETFs, including small-cap fare. These are the funds you'll want to keep an eye on along with a critical individual issue that could pose some risk to each. 1) Guggenheim China Small-Cap ETF

: In the past three months, HAO has actually outperformed the larger and more heavily traded iShares FTSE China 25 Index Fund

and HAO could prove to be the superior bet among all China-specific ETFs if EM ETFs bust out in the second half. Chinese stocks are looking inexpensive, but will only bounce if the central bank is done with monetary tightening. 2) Market Vectors Russia Small-Cap ETF

: Fraught with potential and peril, the newly minted RSXJ is the only ETF devoted exclusively to Russian small-caps. Russia has been an emerging markets stalwart this year and many believe there is some gas left in that tank. However, the gasoline analogy is appropriate because when it comes to Russia, it really is all about oil. While RSXJ is only 17.5% weighted to the energy space and easily the most diverse Russia-specific ETF on the market, a decline in oil prices could throw this baby out with the bathwater. 3) WisdomTree Emerging Markets SmallCap Dividend ETF

: The biggest problem with DGS could also be its saving grace: Factor in Taiwan and we have an ETF that is over 35% exposed to China. If some combination of Brazil, China, South Korea, Taiwan and Thailand can keep a lid on rate hikes, DGS should thrive in the second half. Brazil probably has another rate hike or two left this year, but if China and Thailand oblige and focus on domestic consumption, DGS could deliver 10% or more by year-end. 4) IQ South Korea Small Cap ETF

: The allure of South Korea is easy to explain: It is perhaps the most developed of any emerging market, which at least implies even its small-cap issues are less risky than what the BRIC quartet offers without sacrificing BRIC-like growth potential. As an export-driven economy, South Korea would be helped by some combination of an end to Chinese rate hikes and economic rebounds in the U.S. and/or Japan. In SKOR's favor is the fact that the ETF has easily outperformed the iShares MSCI South Korea Index Fund

on a year-to-date basis.