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Another Small-Cap ETF To Consider

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Another Small-Cap ETF To Consider
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The Russell 2000 Index and the S&P SmallCap 600 Index, two of the most widely followed gauges of smaller domestic companies, have raced to all-time highs this week. On Thursday, nearly 20 domestic small-cap exchange-traded funds hit record highs.

Investors looking for small-cap opportunities outside the U.S. may want to consider emerging markets with the SPDR S&P Emerging Markets Small Cap ETF (NYSE: EWX). EWX tracks an index that holds small companies with market values of at least $100 million up to $2 billion.

What Happened

EWX is down 3 percent year-to-date, a performance that's worse than the loss incurred by the large-cap MSCI Emerging Markets Index and well behind the gains posted by the aforementioned domestic small-cap benchmarks. Those near-term data points belie long-term opportunity with funds such as EWX.

“But by favoring broad, large-cap EM exposures, investors are forgoing exposure to the spark plug that is setting this process in motion: the emerging market consumer,” said State Street Global Advisors (SSgA) in a recent note.

Why It's Important

Like U.S. small-cap ETFs, EWX's holdings generate more of their revenue from local economies. That indicates some of these smaller firms are less export-oriented and potentially less vulnerable to a stronger than are large-cap emerging markets equities. EWX is also a direct play on the tantalizing investment theme that is the emerging markets consumer.

“Given rising incomes, a growing workforce and increased urbanization, the McKinsey Global Institute estimates that domestic consumption in emerging countries will increase from $12 trillion in 2010 to more than $30 trillion in 2025, as their share of world consumption grows from 32 percent to 47 percent,” said SSgA.

Over 22 percent of EWX's 1,071 holdings hail from the two consumer sectors while 21.74 percent are technology names.

What's Next

If emerging markets small-caps start regaining the historical trend of topping large-cap rivals, EWX could be in for some upside as 2018 moves forward.

“In the past decade, EM small caps have delivered annualized returns of 4.36 percent, which is 1.34 percent higher than the broader EM universe. They’ve delivered these returns with a lower standard deviation, resulting in a Sharpe ratio of 0.17 compared to the broad benchmark’s 0.12,” according to SSgA.

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