2023-07-18 14:18:15 ET
Summary
- The SPDR S&P Emerging Markets Small Cap ETF offers investors exposure to small-cap stocks in emerging markets, with significant upside potential and risk.
- Launched in 2008, EWX has $803.07 million in assets under management as of July 2023 and offers a diversified portfolio with 2980 different equities.
- Factors supporting investment in EWX include China's economic growth, geopolitical events leading to de-dollarization, and a falling dollar increasing interest in non-dollar assets. However, risks include geopolitical tensions and regulatory challenges.
Small-cap stocks that succeed offer capital growth at an accelerated pace. The leading U.S. companies with over $1.5 trillion market-caps are Apple ( AAPL ), Microsoft ( MSFT ), and Alphabet ( GOOG ) (GOOGL). These massive companies began as small caps with significant upside potential but substantial risks. In emerging markets, small-cap risks are even greater.
Investors buy small-cap stocks in anticipation of venture capital-like returns that come with commensurate risks. Emerging market investments tend to be riskier than those in the developed U.S. and European capital markets. Therefore, emerging market small-cap stocks can turbocharge risk profiles, offering explosive returns with total loss risks.
The SPDR S&P Emerging Markets Small Cap ETF product (EWX) owns shares in emerging market companies with upside potential and significant risk.
EWX Is a liquid choice
State Street Global Advisors launched EWX in 2008 to invest in small-cap growth and value stocks with market caps below $2 billion in emerging markets. At $54.13 per share on July 18, 2023, EWX had $803.07 million in assets under management. EWX trades an average of 46,670 shares daily and charges a 0.65% management fee.
EWX is a liquid ETF product for those seeking exposure to growing emerging market companies.
A diversified ETF with many holdings
EWX is a diversified float-adjusted market capitalization-weighted index representing the small-cap segment of emerging market countries included in the S&P Global Broad Market Index . The BMI contains over 14,000 stocks from 25 developed and 24 emerging markets.
The chart highlights EWX’s sector diversification.
The chart of EWX’s top holdings highlights that it has no holdings more than 0.69% of the ETF’s assets in any one company. In mid-July 2023, EWX held 2980 different equities.
EWX has kept pace with U.S. small-cap stocks in 2023
EWX has moved higher in 2023.
The 10-year chart shows EWX’s 10.6% rally from $48.94 per share on December 30, 2022, to $54.13 on July 18, 2023.
The Russell 2000 small-cap U.S. Index ETF ( IWM ) is a diversified U.S. small-cap product holding 2,007 equities with market caps below $2 billion. At $195.34 per share on July 18, 2023, IWM had $56.04 billion in assets under management.
The 10-year chart highlights IWM’s 12% rise from $174.36 at the end of 2022 to the $195.34 level on July 18.
Meanwhile, IWM pays investors a $2.83 annual dividend, translating to a 1.45% yield. EWX’s dividend of $1.31 equates to a higher 2.42% yield.
IWM charges a lower 0.19% management fee than EWX at 0.65%. The higher yield reflects higher risk levels in emerging market small-cap companies.
The reasons to consider EWX in July 2023
The following factors support investment in small-cap emerging market stocks in July 2023:
- China is nipping at the U.S.’s heels for a leadership role in the worldwide economy. China remains the leading emerging market country, despite its growth and size. As the dramatic increase in U.S. interest rates filters through the U.S. economy, it could weigh on economic growth, leading to a recession. Emerging market countries tend to have a pro-growth stance using monetary policy stimulus to foster growth. Economic growth in emerging market countries should support the growth of small-cap companies.
- The war in Ukraine, China’s “ no-limits ” alliance with Russia, sanctions on Russia, Russian retaliation, and other geopolitical events have led to nuclear bifurcation and a move toward de-dollarization. BRICS countries, all emerging markets, have been working to roll out a BRICS currency with gold backing. A decline in the U.S. dollar’s role as the worldwide reserve currency could support higher share prices for small-cap emerging market companies.
- The dollar index measures the U.S. currency’s value against the other reserve currencies, including the euro, pound, yen, Canadian dollar, Swedish krona, and Swiss franc. Aside from de-dollarization by BRICS countries, the dollar index has declined from a 20-year high of 114.745 in September 2022 to below the psychological 100 level in July 2023. The over 12% drop since last December is a significant move in typically static currency markets. A falling dollar could increase investors’ interest and demand for non-dollar assets, including small-cap emerging market stocks.
Meanwhile, the leading U.S. stock market indices, including the S&P 500, DJIA, Nasdaq composite and Russell 2000, have posted significant gains in 2023 even as short-term interest rates have risen above the 5% level, and quantitative tightening continues to push rates higher further along the yield curve. The threat of a U.S. recession could cause investors and traders to seek exposure to products like EWX to diversify away from U.S. stock market exposure.
The reasons for caution
Risk is always a function of potential rewards, and investing in EWX for higher returns comes with commensurate risks. Investors must consider the following risk factors when approaching EWX and other emerging market investments:
- Tensions on the geopolitical landscape increase the potential for sanctions, tariffs, export restrictions, and other politically motivated events that can impact and undermine emerging market companies’ ability to profit and grow.
- The regulatory environment and reporting standards for non-U.S. and non-European companies increase investment risks. Corporate and governmental scandals, less robust earnings and financial disclosures, and weak regulations can lead to negative investment outcomes.
- In a tense world, the potential for industry nationalization for political reasons can translate to losses for emerging market investments.
- As witnessed in Russia, hostilities or alliances can lead to export and investment bans or other events that make otherwise profitable investments worthless.
Emerging market exposure is a portfolio diversification tool. EWX is a liquid and highly diversified product that can complement investment portfolios.
While EWX and IWM 2023 performance has been virtually the same, I expect EWX to either significantly out or underperform IWM over the coming months and years. The profit potential comes with higher risks, and EWX’s higher dividend yield reflects those risks. However, a small allocation of EWX is appropriate for balanced portfolios for diversification.
For further details see:
EWX: Market Diversification And Growth Potential With Commensurate Risks