SPDR S&P 500 ETF Trust (SPY), iShares MSCI Emerging Markets Indx (ETF) (EEM): The Case for Emerging-Market Small-Cap ETFs

Besides, small companies are more exposed to local economies and customers, so they may be a better choice when it comes to benefiting from long-term economic growth and rising consumption levels in emerging markets over the coming years.

A better approach than the traditional large-cap approach of ETFs like iShares MSCI Emerging Markets Indx (ETF) (NYSEARCA:EEM) could be SPDR S&P Emerging Markets Small Cap, which tracks the S&P Emerging Markets Under USD2 Billion Index. The index includes all stocks with float-adjusted market capitalizations between $100 million and $2 billion and is reconstituted and rebalanced annually in September.

EWX has assets under management of $760 million and charges a reasonable expense ratio of 0.65% annually. The fund holds 17.3% of its assets in the technology sector, 15.3% in consumer cyclicals, and 13.2% in the industrial sector. EWX carries an average P/E ratio of 11 and a 2.4% dividend yield.

Another interesting candidate could be WisdomTree Emerging Mkts Small Cp Div Fd (NYSEARCA:DGS), an ETF tracking the WisdomTree Emerging Markets SmallCap Dividend Index, which includes about 600 small-cap companies from 17 countries and weighs its holdings based on annual cash dividends paid. Its dividend focus, in addition to providing current income, helps avoid the most speculative and overvalued companies.

This ETF has an expense ratio of 0.63% and assets under management of $1.59 billion. The portfolio has 15.6% of its assets in technology, 16.9% in consumer cyclicals, and 13.8% in industrials. The fund trades at an average P/E ratio of 10 and pays a dividend yield of 4%.

The outlook for emerging markets has become more uncertain lately, but those risks are already reflected in compelling valuations for those markets. From a long-term point of view, current valuation levels look like a convenient entry price for investors with a long-term approach.

Smaller companies offer more exposure to sectors like technology, consumer goods, and industrials, while at the same time avoiding heavily regulated areas of the economy, so they may be the best way to make a long-term investment in emerging countries.

The article The Case for Emerging-Market Small-Cap ETFs originally appeared on Fool.com and is written by Andrés Cardenal.

Andrés Cardenal has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

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