Examining Opportunities Within the Emerging Market Equities Universe

Looking below the surface

The EM equities space is large in nature, but market capitalization allows for rational segmentation among companies. In observing the year-to-date performance of the EM small-cap equities asset class, as represented by the MSCI Emerging Markets Small Cap Total Return Index, it has materially outperformed its mid-cap and large-cap peers, as represented by the MSCI Emerging Markets Mid Cap Total Return Index and MSCI Emerging Markets Large Cap Total Return Index, respectively (see following chart). 

The outperformance of EM Small Cap Equities relative to EM Large Cap Equities can be attributed to China, which dominates the large-cap index with 375 entries, well over half of the total holdings. With the Chinese economy undergoing a significant economic slowdown, the much hoped for post-pandemic recovery that was expected by many failed to come to fruition. Conversely, EM Small Cap Equities have benefited from strong domestic growth cycles within India, Taiwan and Korea; and increased fervor around companies entering the artificial intelligence and electronic vehicles spaces. Due to India’s strong economic growth, firms such as Rail Vikas Nigam Ltd, an Indian central public sector enterprise that works as the construction arm of the Ministry of Railways, have exhibited phenomenal growth within the year thus far. Furthermore, the growing importance of semiconductors has benefited manufacturers, such as Taiwan’s Global Unichip Corporation, which specializes in developing customizable chips for specific uses.      

With interest rates globally being elevated, the next boon for EM Small Cap Equities could come from central banks lowering rates, benefiting firms with strong business plans and decisive management teams. As China’s slowdown continues to weigh on the equities of larger companies, the appeal of EM Small Cap Equities will continue to elevate in investors' minds, as long as the economic landscape supports their growth. 

Investing in EM Small Cap Equities

For investors interested in gaining exposure to the EM Small Cap Equities space, there are various investment solutions through which they can gain exposure to this investment universe. 

For broad exposure, both the iShares MSCI Emerging Markets Small-Cap ETF (Ticker: EEMS) and SPDR® S&P® Emerging Markets Small Cap ETF (Ticker: EWX) provide investors with significant exposure to EM Small Cap Equities, however, the latter (i.e., EWX) has elevated exposure to ‘micro’ EM Small Cap Equities. This particular exposure is due to the fund’s benchmark, the S&P Emerging Markets Under USD 2 Billion Index, which focuses on publicly listed companies that have a total market capitalization between $100 million and $2 billion and are located in countries that have an emerging markets status. Conversely, EEMS’s benchmark is the MSCI Emerging Markets Small Cap Index. 

As highlighted earlier in the article, the economic backdrop of a country is of vital importance within EM Equities. As a fast developing nation, India’s growing importance within their economic region and globally makes having exposure to companies capable of growing alongside the nation’s economic evolution an opportunity investors should consider. The iShares MSCI India Small-Cap ETF (Ticker: SMIN) provides investors with exposure to small public companies in India that are poised for growth. 

Finally, for income-focused investors, the WisdomTree Emerging Markets SmallCap Dividend Fund (Ticker: DGS) provides to dividend paying EM Small Cap Equity companies. For investors who desire both income generation and growth exposure, this solution is capable of fulfilling both. 

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.