Accessing The Emerging Market Consumer? Think Small (Part 4 of 5)
In contrast, small cap emerging market indices tend to provide a more concentrated exposure to domestic demand. These indices are less dominated by large, global cyclical plays and have a higher concentration of companies in industries with a local flavor, such as capital goods, real estate, consumer discretionary, and food and beverages.
Market Realist – Invest in small-cap emerging market funds to focus better on domestic demand in emerging markets.
The graph above shows the sectorial break-down for the iShares MSCI Emerging Market Small-Cap ETF (EEMS). The sector with the highest weightage is technology, which makes up 16% of the fund.
However, the fund has high investment in sectors like consumer cyclical, real estate, and consumer defensive, which give you exposure to domestic demand in emerging markets. EEMS invests 84% of its funds in mid-size, small, or micro caps.
The correlation between EEMS and the S&P 500 (SPY)(IVV) is 0.79, which is less that that of EEM with the American index. However, EEMS is still quite correlated with the S&P 500. This proves that emerging markets aren’t insulated from events around the world (ACWI)(QWLD).
To be sure, I’m not suggesting that investors abandon emerging market large cap stocks. As I’ve been advocating since the end of 2011, there are both short- and long-term rationales for overweighting certain emerging markets (EEM).
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