Under The Hood: Of Emerging Markets And Small Caps (FEMS, EWX, BRF)

Somewhat hidden among the blistering pace of new ETF introductions this year is the proliferation of international small-cap funds. The race to roll out more global small-cap ETFs has even prompted some ETF sponsors to try their luck with concepts that previously failed. It's easy to understand why ETF issuers want to get these funds out to investors: Many have proven popular. Plenty of country-specific small-cap funds have been embraced by investors and the multi-country SPDR S&P Emerging Markets Small Cap ETF EWX has over $913 million in assets under management, indicating there might be room for a new challenger such as the First Trust Emerging Markets Small Cap AlphaDEX Index Fund FEMS. FEMS, which tracks the Defined Emerging Markets Small Cap Index, isn't even a month old yet and the ETF enters an arena with plenty of competition. In addition to EWX, there's the WisdomTree Emerging Markets SmallCap Dividend ETF DGS and the iShares MSCI Emerging Markets Small Cap Index Fund EEMS. Even with the potential for multiple rivalries, FEMS is off a decent start with over $3 million in AUM. Diversity nuts will love this fund as FEMS is home to almost 200 stocks and five sectors – materials, industrials, technology, consumer discretionary and financials – receive double-digit allocations. Those sector weights range from 15.49% for financials to 18.17% for materials and no single stock receives a weight above 1.21%. At the sector level FEMS certainly offers better diversity than its iShares counterpart and is at the very least comparable to its SPDR equivalent. Regarding country exposure, without knowing what "other" is defined as, FEMS offers exposure to 10 countries. At the bottom, Russia receives an allocation of less than 2%. The word of caution on this note is that China and Taiwan combine for over 43% of FEMS' country weight. It's surprising that Brazil and Russia combine for less than 6% of this ETF's weight considering they are huge economies and there are small-cap ETFs exclusively devoted to the duo, the Market Vectors Brazil Small-Cap ETF BRF and the Market Vectors Russia Small-Cap ETF RSXJ. India is also no where to be found in this ETF. We like the fact that FEMS' third-largest country weight is Thailand, but going forward, the ETF might be better served reducing its Taiwan exposure and redistributing it among Brazil, Indonesia, Russia and Thailand. Just our suggestion and if Taiwan loses its emerging markets status this year, FEMS will probably remove the country from its lineup anyway. That could make the new ETF even more intriguing.