Altruist Financial Advisors LLC
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Emerging Markets Small Cap Funds

 

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There are at least two good reasons why most investors should consider investing a portion of their portfolios in emerging market stocks:

bulletEmerging Market stocks have higher expected returns than similar non-emerging market stocks (albeit with higher risk).
 
bulletEmerging Market stocks tend to have relatively low correlations with other asset classes, so including them in a portfolio should improve the portfolio's risk/return characteristics.

For more information on Emerging Markets, see here.

Further, there are at least two good reasons why most investors should consider investing a portion of their portfolios in small cap stocks:

bulletSmall-Cap stocks may have better long-term returns than large-cap stocks.
 
bulletSmall-Cap stocks tend to have relatively low correlations with large-cap stocks, so including them in an otherwise large-cap stock portfolio should improve the portfolio's risk/return characteristics.

There are several similar-seeming investment options available.  Which is best?

The funds are listed in rough order of our overall preference.

Preferences are listed separately for use in retirement accounts and for taxable accounts.

For a listing of our preferences in other asset classes, see here.

Retirement Accounts (i.e., tax-deferred or tax-exempt accounts)

bulletDFA Emerging Markets Small Cap Portfolio (DEMSX).  E/R: 0.72%.  This fund invests in the bottom 20%-40% of 16 emerging market countries.  Stocks of less than $25 million are excluded.  Target country allocations are approximately capitalization weighted in accordance with free float market capitalizations, subject to a buying ceiling.  The buying ceiling should reduce the fund's exposure to political risk.  Rebalancing is only done with new money to minimize transaction fees.

bulletSPDR S&P Emerging Markets Small Cap ETF (EWX).  E/R: 0.65%.  This ETF tracks the S&P/Citigroup Emerging Market Small Cap < $2 Billion Index.  For more information on ETFs, see here.
 
bulletWisdomTree Emerging Markets SmallCap Dividend Fund (DGS).  E/R: 0.63%.  This ETF attempts to track the WisdomTree Emerging Markets SmallCap Dividend Index of emerging market small cap dividend-paying stocks.  This index begins with the 10% smallest (in market cap) stocks in the WisdomTree Emerging Markets Dividend Index, and then weights them by total dividend payout.  We rated this lower than the iShares fund above because we expect DGS's turnover to be higher during its periodic reconstitution -- we expect that this may cause its internal transaction costs to be higher, more than offsetting DGS's lower expense ratio.  Further, DGS is apparently less diversified than the iShares fund, including only dividend-paying stocks.  For more information on ETFs, see here.
 
bulletiShares MSCI Emerging Markets Small Cap Fund (EEMS).  E/R: 0.69%.  This ETF tracks the MSCI EMF Small Cap index.  Unfortunately, this is the least liquid option of those listed here (i.e., highest implicit transaction costs).  For more information on ETFs, see here.

Taxable Accounts

bulletSPDR S&P Emerging Markets Small Cap ETF (EWX).  E/R: 0.65%.  This ETF tracks the S&P/Citigroup Emerging Market Small Cap < $2 Billion Index.  We prefer it to EEMS because it is dramatically more liquid and slightly less expensive.  For more information on ETFs, see here.
 
bulletWisdomTree Emerging Markets SmallCap Dividend Fund (DGS).  E/R: 0.63%.  This ETF attempts to track the WisdomTree Emerging Markets SmallCap Dividend Index of emerging market small cap dividend-paying stocks.  This index begins with the 10% smallest (in market cap) stocks in the WisdomTree Emerging Markets Dividend Index, and then weights them by total dividend payout.  We rated this lower than the iShares fund above because we expect DGS's turnover to be higher during its periodic reconstitution -- we expect that this may cause its internal transaction costs to be higher, more than offsetting DGS's lower expense ratio.  Further, DGS is apparently less diversified than the above funds, including only dividend-paying stocks.  For more information on ETFs, see here.
 
bulletiShares MSCI Emerging Markets Small Cap Fund (EEMS).  E/R: 0.69%.  This ETF tracks the MSCI EMF Small Cap index.  Unfortunately, this is the least liquid option of those listed here (i.e., highest implicit transaction costs).  For more information on ETFs, see here.
 
bulletDFA Emerging Markets Small Cap Portfolio (DEMSX).  E/R: 0.72%.  This fund invests in the bottom 20%-40% of 16 emerging market countries.  Stocks of less than $25 million are excluded.  Target country allocations are approximately capitalization weighted in accordance with free float market capitalizations, subject to a buying ceiling.  The buying ceiling should reduce the fund's exposure to political risk.  Rebalancing is only done with new money to minimize transaction fees.

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This web page contains the current opinions of Eric E. Haas at the time it is written and such opinions are subject to change without notice.  This web page is intended to serve two purposes:

bulletTo educate the public; and
bulletTo provide disclosure of Mr. Haas' opinions to prospective clients.  We believe that prospective clients are well-served by being made aware of what they are buying and what they are buying is advice that is based on these opinions.

We believe the information provided here to be useful and accurate at the time it is written.  Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. 

No investor should invest solely on the basis of information listed here.  Before investing, it is important to consult each prospective investment's prospectus and consider both its risk/return characteristics and its effect on your overall portfolio.

This information is not intended to be a substitute for specific individualized tax, legal, or investment planning advice.  Where specific advice is necessary or appropriate, Altruist recommends consultation with a qualified tax adviser, CPA, financial planner, or investment adviser.  If you would like to discuss the rationale or support for any particular idea expressed on this web page, feel free to contact us.

 

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