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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:
 | Emerging Market stocks have higher expected returns than similar non-emerging
market stocks (albeit with higher risk).
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| Emerging Market stocks 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 invest a portion of
their portfolios in small cap stocks:
| Small-Cap stocks may have better long-term risk-adjusted returns than
large-cap stocks.
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| Small-Cap stocks 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?
All of the options discussed here will likely have somewhat similar
performance and any of them will probably get the job done quite well. You
can't go far wrong choosing any of the options listed here. The funds are listed in rough overall
order of 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)
| DFA Emerging Markets Small Cap Portfolio (DEMSX). E/R: 0.80%. 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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| SPDR 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.
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| iShares MSCI Emerging Markets Small Cap Fund. E/R: 0.75%. This
ETF, which is not yet released, will track the MSCI EMF Small Cap index. For more information on ETFs,
see here.
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| WisdomTree 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. |
| SPDR 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.
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| iShares MSCI Emerging Markets Small Cap Fund. E/R: 0.75%. This
ETF, which is not yet released, will track the MSCI EMF Small Cap index. For more information on ETFs,
see here.
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| WisdomTree 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.
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| DFA Emerging Markets Small Cap Portfolio (DEMSX). E/R: 0.80%. 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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