Euro Small Cap ETFs: The Way to Play Europe?
Fiscal 2011 marked economic, social and political unrest in most parts of Europe. The slippery situation in the Euro zone seems to have lasted an eternity without a fool-proof remedy. The effects of the situation are not only limited to the Eurozone but have spread over the rest of the world, including emerging and developed economies (see Five Emerging Market Infrastructure ETFs For The Coming Boom). Although there have been attempts to tackle the worsening debt situation in Europe, there does not seem to be a long-lasting solution.
For example, the much needed bailout package received by Greece back in March 2012 was viewed by many as just “delaying the inevitable Greek default.” Meanwhile, the disappointing picture in the Spanish bond auction also raised borrowing costs sharply taking yields past the 5% mark (read Spain ETF Slumps On Weak Bond Auction). With these and other developments in Europe, one can only imagine that the Euro zone problems are far from over.
Thanks to these ongoing issues, the European equity markets provided a negative return of around 15-20% in 2011. This was mainly due to a highly negative trend back in August and September of the period in question. At that time, the European equity markets witnessed sharp dips on account of a possible Greek debt default, thereby triggering recession. Great Britain, which is not part of the Eurozone, also felt the heat as the broader markets ended in the red for the year (read ETF Trading Report: European, Growth ETFs In Focus).
However, 2012 has been a good year so far for investors. Things have pretty much been smooth, for both domestic and the European front. However, a reversal seems inevitable in the very near future, especially if bond yields continue to rise across the PIIGS nations.
In particular, small cap ETFs targeting the space could make for interesting investments during these difficult times.
The performance of European small caps was majorly impacted during the recent stretch, as small caps tend to perform poorly compared to their large cap counterparts during periods of economic uncertainty. Given the market performance as a whole, the year didn’t prove to be fruitful for European small cap investors.
However, on the flipside, it is also prudent to note that mid and small cap stocks are more sensitive that their large cap counterparts to positive economic trends as well (read Mid Cap ETF Investing 101). As a result, any positive development on the economic front will at once be discounted by the small caps and fetch substantially higher returns than large caps.
In any given situation, investments in small cap stocks require a steady appetite for risk, since some of them are highly illiquid and lesser known companies who are yet to uncover their value. However, if used decisively, they can prove to be major money making tools. An ETF approach to small caps in the European markets is therefore recommended for investors looking for an aggressive play on the European economic recovery.
iShares MSCI United Kingdom Small Cap (EWUS) was launched in January of 2012 and tracks, before expenses, price and yield performance of the MSCI United Kingdom Small Cap Index. The index measures the equity performance of small cap companies whose market capitalization represents the bottom 14% of the U.K equity markets.
The fund holds 269 securities currently and has total assets of $2.86 million. EWUS allocates its assets uniformly across all securities of the index ensuring that concentration risk is entirely diversified. The ETF can be a decisive tool for investors looking for European exposure for their portfolio and at the same time, avoid the debt infected countries.
Unfortunately, the expense ratio for the fund stands high at 59 basis points. Going forward, the product is expected to perform well, given its popularity and as indicated by the inflow in its asset base in some three months.
For investors looking to play the German small cap market iShares MSCI Germany Small Cap (EWGS) and Market Vectors Germany Small-Cap ETF (GERJ) can be good options. EWGS tracks the MSCI Germany Small Cap Index, whereas GERJ tracks the Market Vectors Germany Small-Cap Index. These two funds are very similar in terms of their coverage, expense structure, holdings and target market.
However, both the relatively new funds differ in terms of popularity and liquidity. EWGS has an average daily volume four times that of GERJ. Meanwhile for costs, EWGS has an expense ratio of 0.59% whereas GERJ charges investors 55 basis points in fees and expenses, and both the funds have seen good inflows in their asset base.
WisdomTree Europe SmallCap Dividend ETF (DFE) was launched in 2006 and tracks, before fees and expenses, the performance of the WisdomTree Europe SmallCap Dividend Index. The fund only considers the bottom 25% stocks of the index. DFE seeks to generate current income for investors in the form of regular dividends along with long-term capital appreciation. (see Russell Launches Two New Dividend ETFs). DFE pays out a yield of 5.02% and charges investors 58 basis points in fees and expenses.
The fund holds 335 securities in all, at present and uniformly distributes its assets across the range of securities in its portfolio. It holds 10.61% of its assets in the top ten holdings and has managed $28.04 million since its inception.
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