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Consider Allocating to Emerging Market Small Caps

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The iShares MSCI Emerging Markets Small Cap Index Fund (EEMS) is one way to increase exposure to emerging market domestic demand (and potentially the economic power of those estimated 5 billion new cell phone users) in a diversified format.

Consider investing in emerging market small-caps

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Market Realist – Consider allocating to emerging market small caps.

The graph above compares the performance of EEMS with the performance of the iShares MSCI Emerging Market Index ETF (EEM) since August 2011, when EEMS came into being. Emerging markets (VWO) have given nowhere near the kinds of returns we’re used to.

EEM has returned 7.1% since August 2011, while EEMS has done slightly better, returning 13.2% in the same period. As you can see, both ETFs have been choppy. We discussed the reasons for this lackluster performance in Part 1 of this series. In contrast, the S&P 500 (IVV) has given returns of 85.0% in the same period—backed by ultra-easy monetary policy.

Emerging markets are likely to be weak in the short term, with the Fed likely to hike rates in the coming months. This hike should draw funds to the United States and away from emerging markets. However, they make sense as an investment in the long term, as they’re still likely to grow at a faster pace than the developed world (EFA). Emerging markets also appear cheap at the moment compared to US stocks.

EEMS is likely to be more volatile (VXX) than EEM. However, it’s more promising, as it gives you more exposure to the consumption sectors and is better insulated to the developed world.

Read Accessing The Emerging Market Consumer? Think Small for more on why you should consider buying emerging market small-cap stocks.

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