Emerging markets have long have been attracting investors from
all around the globe due to their high growth potential and rapid
pace of industrialization. Fiscal 2010 marked a very good year for
the emerging markets as the aftermath of the 2008 crisis seemed to
be fading and global growth was back on track.
However, things have been quite different as of late as a series
of socio-economic as well as political problems from developed
nations have plagued market sentiment. Now, it appears as though
the euro zone crisis is spreading, forcing many investors to
reconsider deploying assets across the globe but especially in the
small cap emerging market space. (read
Euro Small Cap ETFs: The Way to Play Europe?
Exchange Traded Funds (ETFs) make for a cost effective as well
as flexible investment avenue for investors to play the growth
potential of these attractive markets. However, many products in
this space have slumped badly so far this year. Small cap emerging
market ETFs were affected more than their mid and large cap
counterparts, plunging to start the 2012 period.
Although it is true that small caps ETFs have the potential to
fetch higher returns than their large cap counterparts, the flip
side also holds true. During the previous year, small caps and
emerging markets have proved to be a dangerous combination, best
evidenced by the following three ETFs:
Market Vectors Russia Small-Cap ETF (
which tracks the Market Vectors Russia Small-Cap Index, has lost an
incredible 41.30% in the last one year period. The slump can be
primarily attributed to the fact that Russian exports are primarily
of the oil variety and prices for this commodity-as well as euro
zone demand-have fallen off a cliff to start the year.
Further, RSXJ allocates a solid level of its assets to companies
from the energy sector (24.40%) (see
Why Russia ETFs Are Not A Debt Crisis Safe
). Concentration risk also seems to be a major issue as the ETF
presently holds 33 securities in its portfolio and allocates 57.06%
of its total assets to the top 10 holdings.
The fund debuted in April last year and since then has managed
to accumulate $9.02 million in its asset base. The ETF has below
average liquidity in the market as on an average it trades 12,602
shares daily. RSXJ also charges a steep expense ratio of 67 basis
points and pays out a paltry yield of 0.51%.
Market Vectors Indonesia Small-Cap ETF (
has lost almost 13% since its inception this year in March 2012.
The ETF charges 61 basis points in fees and expenses and holds 26
securities in its portfolio currently. The ETF is very highly
concentrated in its top 10 holdings in which it allocates almost
Although the ETF is a relatively new addition in this segment,
it can be said that the timing of the launch was quite poor amidst
global economic crises. While investors somewhat have shown
appetite towards the product as indicated by its total assets of
$4.31 million and average daily volume of approximately 4700
shares, the ETF has not been able to live up to investor
The ETF tracks the Market Vectors Indonesia Small-Cap Index and
consists of stocks having a market capitalization of less than $1
billion. The ETF relies heavily on financial (39.5%) and industrial
Given the lack of desire for financial exposure at this time, it
shouldn't be too surprising to see how poorly this fund has fared.
While IDXJ doesn't have much in the way of European debt exposure,
the general risk off trade has undoubtedly crushed the fund so far
Market Vectors Brazil Small-Cap ETF (
was launched in May of 2009. It tracks the Market Vectors Brazil
Small-Cap Index. The index is comprised of small cap stocks
publicly traded in the Brazilian markets and with principal
business operations within the geographic boundaries of Brazil.
Despite showing an impressive inflow in its asset base, BRF has
slumped 35.74% in the last one year period. While Brazil has been
one of the favorite destinations for investors targeting the
emerging market space, the economy has been countering inflationary
problems of its own.
This, along with falling commodity prices, has impacted the
Brazilian economy and the small cap space adversely (read
Are Investors Abandoning Brazil ETFs?
). Small caps being more sensitive to the broader economic scenario
were hurt badly and more so than their resilient large cap
BRF charges 59 basis points in fees and expenses and has an
asset base of $460.32 million. Approximately 326,109 shares of BRF
are traded each day in the markets. The ETF holds 77 securities
presently and allocates around 33% of its total assets in the top
10 holdings. The fund relies heavily on the Consumer Defensive,
Consumer Cyclical, Industrials and Real Estate sectors.
Learning experience for Investors
Overall, the performance in the space has been downright
dreadful to start the year. The value of $1000 invested a year ago
in RSXJ would presently be worth $591.41. While in BRF it would be
worth $644.90 and an investment in IDJX since its inception in
March 2012 would amount to $870.
Emerging markets are generally characterized by high economic
growth rate, high inflation and reducing unemployment rate. Many
argue that these nations enjoy a superior economic growth rate than
their developed counterparts. While this might be true in terms of
actual growth percentages, on an absolute growth basis, developed
nations tend to grow more than emerging ones.
Thanks to this, as well as the safe haven status of many
developed nations, times of economic uncertainty tend to tilt the
returns towards developed markets instead of emerging nations.
Investors often fail to understand this fact before they take any
investment decision and especially when the focus is on other
developed markets and not on industrializing nations.
Small cap emerging market ETFs are consequently high risk/return
investment avenues. The slippery situation in the Euro zone was
responsible for global risk aversion which caused institutional as
well as retail investors to withdraw funds from the riskier asset
This also caused many emerging currencies such as the Brazilian
real, Mexican peso, Russian rouble, South Korean won, South African
rand and Indian rupee to underperform relative to the USD. (see
Indian Rupee ETFs: Is The Slide Over?
While this should have been a favorable proposition for many
export oriented emerging markets, instead the trade deficit and the
economic growth rate slowed down in the first quarter of 2012 for
many of these emerging market economies.
In fact, one of the fastest growing economies in the emerging
markets, the Indian economy, grew by a mere 5.3% in the
January-March quarter. China and South Korea also witnessed sharp
declines in their industrial production. (read
Are Korean ETFs In Trouble?
While it is true that investing in emerging markets can prove to
be fruitful for investors, it is prudent to note that it requires a
steady appetite for risk and especially during times of a
downtrend, when it requires continuous portfolio monitoring and
Guide to Small Cap Emerging Market ETFs
Moreover, investors would be better off playing individual
stocks with good balance sheet and sound fundamentals, rather than
a basket approach, at least in the small cap emerging market ETF
world at this time.
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MKT VEC-BRZL SC (BRF): ETF Research Reports
MKT VEC-INDO SC (IDXJ): ETF Research Reports
MKT-VEC RUS SC (RSXJ): ETF Research Reports
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