The so called Small Caps are companies with small market capitalization. International small-cap companies often have several thousand employees and sales in the hundreds of millions of dollars each year, and a market capitalisation under $2 billion.
Just some examples from Asia: HMM for short, or better known the Korean Hyundai Merchant Marine, which is the biggest percentage in the MSCI Emerging Markets Small Cap Index. HMM is one of the world’s biggest manufacturing company for container ships. The Chinese GCL-Poly Energy provides polysilicon for the solar and semiconductor industries. The Adani Total Gas is one of the biggest gas supplier in India. The Yang Ming Marine Corporation ships your goods from China to everywhere in the world, without knowing the company´s name. The constituents of the index are leaders of different industries, e.g. manufacturing, energy distribution, transportation or financial services.
The Top 10 constituents of the MSCI Emerging Markets Small Cap Index are:
- Hyundai Merchant Marine
- GCL Poly Energy
- Adani Total Gas
- Parade Technologies
- Sinoamerican Silicon Pro
- Yang Ming Marine Corporation
- Cholamandalam Investment & Finance Company Limited
- Macronix International
- HengTen Networks Group Limited
- Walsin Lihwa Corporation
They are among around 1680 stock corporations in the MSCI Emerging Markets Small Cap Index, which pools small companies from emerging countries, like India, Korea, Taiwan, China, etc. The index covers around 14% of the free float-adjusted market capitalization in each countries, throughout 27 Emerging Markets countries, according to MSCI.
Why is it interesting to purchase an ETF on this index?
The companies in the MSCI Emerging Markets Small Cap Index are just “small” in comparison to Asian and well known stock market giants such as Samsung and Alibaba, when it comes to corporations from emerging markets. Lots of these Small Cap stocks are not even tradable in Europe, or not even known names, even if they are in business since the mid 60´s and influence our everyday life. However this “unknown” and non-tradebale status is not a downside. Small Caps in particular, there are lots of start-ups with appealing business areas, which are before a huge development in the emerging markets. Many of today’s Internet and tech giants started also really small, and we have to keep in mind, that the population of India and China together means tremendous new possible customers, who use local service providers and not the well known US or European companies, which can not enter to the Asian market easily.
The charm of the MSCI Emerging Markets Small Cap Index depends on the fact that it does not really overlap with the regular world indexes, which are bought by the regular investors in the US or Europe. The most typical global index, the MSCI World, only covers large companies and a number of medium-sized companies, almost 60% from US and only 40% from the rest of the world, including Europe, too. The exact same applies to the MSCI All Country World Index, which in addition to the established industrialized countries, also covers some emerging countries such as India, Russia, China and Brazil.
There is only one index that summarizes all market sectors and with 8906 publicly traded companies, offers an almost complete (99%) picture of the global stock markets: the MSCI ACWI Investable Market (IMI). The only ETF offered in Germany that tracks this index is the SPDR MSCI ACWI IMI UCITS ETF (ISIN: IE00B3YLTY66, WKN: A1JJTD, 0,4% TER). Be careful, this ETF is only in his name ACWI IMI, in realty it holds only ca. 1550 stocks, which is less than in a usual MSCI All Country World Index ETF. It is a better choice to use Vanguard FTSE All-World UCITS ETF – USD ACC (ISIN: IE00BK5BQT80, WKN: A2PKXG, 0,22% TER) or the Vanguard FTSE All-World UCITS ETF Dist (ISIN: IE00B3RBWM25, WKN: A1JX52, 0,22% TER) – these ETFS hold ca. 3570 different stocks.
No overlapping with the MSCI World Index
Investors, who depend on several ETFs have the advantage that they can pick the ideal percentage between the classic and exotic ETFs themselves. In those super index above (MSCI ACWI Investable Market or the FTSE All-World), for example, all small-cap stocks together only have a share of around 14%, small companies from emerging countries just 1,7%. The sum of the ten biggest stocks in the MSCI Emerging Markets Small Cap has an index share of less than 3,6%. For comparison: in the MSCI World index, Apple’s leading position alone has practically 4%.
With an ETF on the emerging market index, you are betting on the entire diversity of the economy – not on specific organizations, concepts or countries, like S&P500, or any special Robotics or Healthcare ETFs. Advantage of diversification: even one or the other company insolvency does not matter as long as the majority of the index stocks achieve success in the market. As long as Asia is one of the biggest source of many US an EU based industries, producer of consumer goods, to invest in the Emerging Markets is a good choice.
Use just as diversification, not as only ETF investment
The long term have small caps a much better return as the stocks of big companies, but that is no assurance of future positive performance.
The MSCI Emerging Small Cap Index recently was even behind the broad market: over a five-year average, it brought just 11,4%/ year, while the MSCI ACWI Investable Market (IMI) grew by 14,3%/ year.
For European buyers these two ETFs makes the emerging markets accessible: SPDR MSCI Emerging Markets Small Cap UCITS ETF (ISIN: IE00B48X4842, WKN: A1JJTF, 0,55% TER) or the iShares MSCI Emerging Markets Small Cap UCITS ETF (ISIN: IE00B3F81G20, WKN: A0RGER 0,74% TER)
Regardless of all the advantages, an ETF on the MSCI Emerging Markets Small Cap Index remains a very exotic investment that is just appropriate as an addition to broadly based portfolios. Anyone who has put at least 70% of their investments in the MSCI World Index or comparable indices, for instance, can invest the rest a bit more speculatively, e.g. to buy the MSCI Emerging Small Cap Index. Putting up to 10 – 20% of the equity investments in an ETF in small-caps from emerging markets is reasonable.
There is one thing that fans of the stock market can certainly achieve by purchasing a small-cap ETF: the diversity of their portfolio becomes even higher, without stock picking.
Sources:
Test.de: ETF Emerging Markets Small Cap Kleine Aktien aus Schwellenländern fürs ETF-Depot
MSCI Emerging Markets Small Cap Index
The Balance: When Is the Best Time to Invest in Small-Cap Stocks?