McClone calculates that the top 10 companies on the MSCI emerging market small-cap index generate 91% of their revenue from the domestic economies, whereas top 10 emerging market large-caps garner 58% of revenue from their home economies.
However, the greater volatility in large-caps may be due to the higher investor interest. Still, the less liquid small-caps may become vulnerable to a liquidity squeeze during a serious bear market.
“Also, there are a lot of fund flows coming in and going out of large-cap emerging-market stocks from ETFs and mutual funds, which makes them more volatile,” Swarup added.
Emerging markets small-cap ETFs include:
- WisdomTree Emerging Markets SmallCap Dividend Fund (NYSEArca: DGS)
- SPDR S&P Emerging Small Cap ETF (NYSEArca: EWX)
- iShares MSCI Emerging Markets Small Cap Index Fund (NYSEArca: EEMS)
- First Trust Emerging markets Small Cap AlphaDEX Fund (NYSEArca: FEMS)
For more information on developing economies, visit our emerging markets category.
Max Chen contributed to this article.