2023-07-19 18:37:24 ET
Summary
- SPDR® S&P Emerging Markets Small Cap ETF invests in a large pool of small-cap stocks in emerging market companies that possess strong upside potential, but also possess significantly high risk.
- 60% of EWX assets are invested in emerging markets of Taiwan, Hong Kong, India, and China, which are growing at a faster rate and are of investment grade.
- As per IMF reports, these emerging markets are poised for high growth in the coming years. Central banks of these EMs are also effectively controlling the money supply.
- Historically, EWX generated a steady but low yield, and equally low returns. However, over the past 9 months, the fund has been growing at a very fast pace.
~ by Snehasish Chaudhuri, MBA (Finance).
SPDR S&P Emerging Markets Small Cap ETF ( EWX ) is an exchange-traded fund ("ETF") that invests its $674 million asset in almost 3000 growth and value stocks of small-cap companies operating in diversified sectors. It hardly invests more than 0.3 percent of its total assets in any particular stock. The fund invests almost 60 percent of its assets in the four emerging markets (Taiwan, India, China, Hong Kong) that are growing at a high rate and have investment grade sovereign bond ratings. For obvious reasons, the fund has invested 60 percent of its asset base in a large pool of technology, banking, industrial and healthcare stocks. EWX generates a steady but low yield. Total returns are also steady, but excessively low. However, over the past 9 months it has been growing at a very fast pace, which generated much interest among investors. EWX is also currently trading at a marginal discount of 0.07 percent.
EWX Is Tilted Towards Small-Cap Growth Stocks In Emerging Asian Markets
SPDR S&P Emerging Markets Small Cap ETF was launched by State Street Global Advisors, Inc. The fund seeks to track the performance of the S&P Emerging Markets Under USD2 Billion Index and uses representative sampling techniques in order to create its portfolio. It is a float-adjusted market-cap weighted index that includes small-cap stocks mostly from emerging markets ("EM").
SPDR S&P Emerging Markets Small Cap ETF was formed on May 12, 2008, and has been paying semiannual dividends since then. Historically its yield has been low but not marginal or negligible. For the past 10 years, yield mostly ranged between 2 to 3 percent. It has an expense ratio of 0.65 percent and a turnover of 23 percent. Average P/E ratio of EWX's portfolio of stocks is 17.95.
EM-Asia Banks Are Preserving The Growth Narrative Without Over-Tightening
Based on the world economic outlook report by the IMF, investors ought to feel confident. Over the next two years, the IMF expects EM-Asia to offer the best growth prospects. EM-Asia banks such as the Reserve Bank of India ((RBI)), and the Bank Indonesia ((BI)) are doing their bit to preserve the growth narrative, without over tightening too much. Contrary to market expectations RBI has maintained its repo rate at a high level between 5.9 to 6.5 percent. BI has been maintaining the status quo, too.
These developments are surely going to provide a boost towards economic growth and install confidence in the mind of investors. However, if growth prospects do not materialize in reality, it would reflect poorly on SPDR S&P Emerging Markets Small Cap ETF.
Political Developments In Taiwan Will Be A Key Factor For The Future Of This Fund
The only rationale behind investing in a portfolio of small-cap stocks is for higher returns. However, such a return will come only with added risks. Investors should consider the geopolitical risks that may include potential for sanctions, export restrictions, tariffs, and other politically motivated events. Corporate and governmental scandals and weak regulations may also lead to negative outcomes. As these regions keep on growing, new economic blocks are brewing up in this part of the world. This fact will increase geopolitical tensions that we already have witnessed in different parts of Southeast Asia. If the Russian invasion of Ukraine gets repeated in the form of China's invasion or aggression over Taiwan, then these small-caps from EMs will go for disaster.
Investors thus need to watch out for political developments in Taiwan, as 27.6 percent of the portfolio is invested there. Investments in Taiwanese stocks may generate high volatility as the country undergoes an election in January 2024. If William Lai Ching-te, the presidential candidate from Democratic Progressive Party ends up winning the election, it would be taken quite negatively by the People's Republic of China ((PRC)), as he is someone who is very keen to assert Taiwan's independence. This may prompt PRC to exert greater pressure on Taiwan, and who knows how the United States would react to such developments. Moreover, Taiwan does not have the luxury of losing PRC as a trade partner, as the PRC and Taiwan undergo a strong bilateral trade.
Investment Thesis
SPDR S&P Emerging Markets Small Cap ETF invests in a large pool of small-cap stocks from EMs that have upside potential but also possess significant risks. 60 percent of its assets are invested in four EMs that are growing at relatively higher rates and have investment grade sovereign bond ratings. A large chunk of these funds is invested in information technology, banking, industrial and healthcare sectors. These sectors have the maximum growth potential within those EMs. Investors invest in such small-cap stocks from EMs in anticipation of higher returns that also come with equally high risks. Generally, investing in emerging economies are also riskier than those in developed economies like that of the United States and Europe. Thus, while investing in this EM fund, investors must also consider its underlying risk factors.
SPDR S&P Emerging Markets Small Cap ETF so far generated a steady but low yield, and equally low returns. However, the fund was quite steady and always stayed positive. Interestingly, over the past 9 months it has been growing at a very fast pace, which generated much interest among investors. If the IMF reports to be believed, these emerging market economies are poised for strong growth in the coming two years. Central banks of these emerging economies are also doing their bit to preserve the growth narrative, without over tightening too much.
Banking on such growth, these funds are also in a position to deliver strong returns. Investors can opt for SPDR® S&P Emerging Markets Small Cap ETF for the short run.
For further details see:
EWX: Historically Low-Return Fund Of Small-Caps, Looking Promising Of Late