Are Small-Caps a Better Emerging Market ETF Option? | ETF Trends

Emerging market stocks and exchange traded funds provide high returns but are known for their high volatility. However, small-cap emerging market equities have shown robust returns, according to a financial research firm.

MSCI found that emerging market small-caps have generated a 14.1% annualized return over the last decade while also providing portfolio diversification in recent years, reports Lewis Braham for Bloomberg.

Emerging market large-caps moved with the S&P 500 Index 84% of the time over the past three years – emerging market small-caps only had a 0.69 correlation to the S&P. Additionally, over the past 17 years, the average emerging market small-cap has been less volatile than the average large-cap. [Emerging Market ETFs: Higher Growth, Better Demographics]

Emerging market small-caps are less sensitive to developed country problems as they are tied to domestic growth.

“If you look at the broad large-cap emerging-markets index, a lot of the stocks in it are exposed to the developed world, which is in crisis or slow-growth mode,” Todd McClone, manager of the William Blair Emerging Markets Small Cap Growth Fund, said in the article. “Small caps are more exposed to domestic consumption.”

“The small- and mid-cap index is more exposed to the domestic economy, so there is a higher weighting of stable consumer sectors,” Ashish Swarup, manager of the new Fidelity Emerging Markets Discovery Fund, said.