Going Small With EM Stocks Could Payoff Big

Some major U.S. small-cap exchange traded funds have recently touched record highs. Investors looking for opportunities with smaller companies outside the U.S. can consider the SPDR S&P Emerging Markets Small Cap (NYSEARCA: EWX).

EWX tracks the S&P Emerging Markets Under USD2 Billion Index. The index includes companies with a market cap of at least $100 million up to $2 billion. An important advantage of emerging markets small-caps is that these companies are usually more levered to growing themes within domestic economies whereas large-cap emerging markets companies are more exposed to global macro trends.

“Emerging market small caps have a higher sensitivity to increases in domestic consumption; given that they derive a lower portion of their sales internationally,” said State Street in a recent note. “As rural populations urbanize and enter the middle class, the effect of their spending power is likely to be felt first in consumer goods like health, beauty and lifestyle products. These purchases will take place in markets not yet saturated by large multinational conglomerates and department stores.”

More Important EWX Details

The $548.12 million EWX, which celebrated its tenth anniversary a few days ago, holds nearly 1,100 stocks. None of those holdings exceed weights of 0.54%.

“Looking ahead, emerging market small-cap firms are expected to grow their earnings per share at a rate of 21.6% over the next three to five years. This is 3.9% higher than the broad EM benchmark and 1.7 times higher than members of the S&P 500,” according to State Street.

Taiwan is the largest country weight in EWX at 29.47%. China and India combine for 31% of the fund’s weight. Overall, 28 countries are represented in the fund. Importantly, EWX is levered to the emerging markets consumer theme with a combined weight of over 37% to the technology and consumer discretionary sectors.

“In the past decade, EM small caps have delivered annualized returns of 4.36%, which is 1.34% 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 State Street.

For more information on small-capitalization stocks, visit our small-cap category.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.