If developing economy investments are making a comeback, one might anticipate the largest price gains to come from the smallest and most battered emerging market ETFs. Small-company emergers in India and Russia have had the most success in outhustling both EEM and SPY over the last two months.
| Should You Revisit Emerging Market Small Caps? | ||||||
| Approx 2 Months % | ||||||
| Market Vectors India Small Cap (SCIF) | 38.7% | |||||
| Market Vectors Russia Small Cap (RSXJ) | 11.8% | |||||
| Market Vectors Brazil Small Cap (BRF) | 9.8% | |||||
| SPDR S&P Emerging Market Small Cap (EWX) | 4.8% | |||||
| Guggenheim China Small Cap (HAO) | -6.3% | |||||
| iShares MSCI Emerging Markets (EEM) | 10.0% | |||||
| S&P 50 SPDR Trust (SPY) | 1.5% | |||||
One reason that certain small-cap country funds have done remarkably well over a short-time period may be attributable to geopolitical factors. India’s recent election of a pro-market reformer has been a boon for Market Vectors India Small Cap (SCIF), while an easing in Ukraine tensions has propped up Market Vectors Russia Small Cap (RSXJ). Another factor? Both began the second quarter with several of the lowest price-to-earnings ratios of any stock ETF in the entire universe. While RSXJ may still lay claim to a trailing 12 month P/E below 6, the rapid price appreciation for SCIF has likely pushed its P/E north of 13. Still, it appears to be a worthy competitor to IWM, the ultra-expensive U.S. Russell 2000 proxy. The trailing 12-month P/E for the Russell 2000 is north of 100.
It may be too difficult for many to accept the idea that emerging market small caps could be safer risk-reward prospects than U.S. small-caps. On the other hand, it should not be too challenging to recognize the strong possibility that now is the time to shop abroad. Look for funds — large or small — with relatively low price-to-earnings ratios as well as technical uptrends.
For instance, iShares MSCI South Korea traded at a price of 65 roughly three years earlier. It still trades at a similar price point. In essence, you can purchase EWY for the same price as you would have paid three years ago, but with a whole lot more corporate earnings from the index components. The current P/E is approximately 10 and the asset boasts a solid technical uptrend above its 200-day trendline.