A Bold Bet On An Emerging Markets Rebound

Emerging markets stocks and the related exchange traded funds are being slammed by the trade wars as confirmed by the MSCI Emerging Markets Index being down nearly 7 percent over the past month.

That might be enough to steer investors away from the combination of developing economies and small-cap stocks, but opportunistic investors may want to consider funds, such as the SPDR S&P Emerging Markets Small Cap ETF EWX.

What Happened

The $471 million EWX tracks the S&P Emerging Markets Under USD2 Billion Index. With emerging markets stocks struggling amid geopolitical headline risk, bringing small caps into the equation would appear risky, but EWX belies that notion. Over the past month, EWX is off 4.90 percent, performing significantly less poorly than traditional large-cap emerging markets benchmarks over that period.

“With US dollar strength likely to fade going into the end of the year and late-cycle dynamics potentially supporting commodity prices, a broad EM allocation may be appealing, especially with the currently attractive valuations,” said State Street in a recent note.

Why It's Important

EWX holds over 1,400 stocks, giving it a deeper bench than some traditional domestic small-cap funds. Additionally, the fund is geographically diverse with exposure to nearly 30 countries.

Importantly, EWX is not heavily dependent on Chinese stocks. Unlike basic large-cap emerging markets ETFs where China is usually the largest geographic weight, EWX's largest country exposure is Taiwan, one of the least volatile developing economies. Taiwan's weight of 29.32 percent in EWX is more than double the fund's China allocation.

Still, it's hard for some investors to move past the out-performance of U.S. stocks over emerging markets over the past decade.

“This underperformance has created attractive valuation opportunities in the region (EM),” said State Street. “Relative to the S&P 500, EM equities are now trading in the bottom quartile based on various price multiples.”

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