NEW YORK (TheStreet) -- Emerging markets are wildly attractive right now and small cap-focused ETFs give investors an exotic opportunity to tap into the companies most directly affected by their domestic populations.
There are numerous options available for ETF investors looking for a taste of the emerging markets. For instance, investors can use funds such as
Claymore/BNY BRIC ETF
, which pools companies from across a number of nations, therefore gaining broad exposure to the emerging world.
The other option for investors is to pick and choose countries, opting for single nation products such as
iShares MSCI Brazil Index Fund
Market Vectors Indonesia
to get their emerging market fix.
Today, it is even possible to play specific sectors, picking up funds such as the
Global X China Technology ETF
Global X Brazil Financials ETF
While effective in targeting the largest and most recognizable companies these nations, these large cap funds often fall short when it comes to tapping into the actual populations of the nations,.
Consider EWZ. Although this fund is designed to track the Brazilian economy, the largest portions of its portfolio are dedicated to
and Vale, two firms which, while based in Brazil, do a massive amount of their business internationally. Meanwhile, smaller companies which are more directly influenced by the citizens of Brazil go largely unnoticed.
Investors looking to tap into the "real" economies of these nations need to find products which highlight these smaller companies. Luckily, the ETF industry has expanded to achieve this task.
A number of companies have taken to launching emerging market ETFs designed to tap into the smallest publicly traded companies listed in their respective stock markets.
Using products such as the
Market Vectors Brazil Small Cap ETF
Claymore/AlphaShares China Small Cap ETF
, investors can gain exposure to companies that do a larger portion of their business in their respective nations.
As with any small cap-oriented ETF, small-cap emerging market ETFs are considered more volatile than their large cap counterparts. However, with this volatility comes the opportunity to see higher returns.
For instance, so far in 2010, the HAO has handedly outperformed funds such as the
iShares FTSE/Xinhua China 25 Index Fund
PowerShares Golden Dragon Halter X China Portfolio
. The same can be said for BRF vs. the large cap EWZ.
Aside from HAO and BRF, investors can tap into small cap companies in India, Taiwan and South Korea, using
Market Vectors India Small Cap Index ETF
IndexIQ Taiwan Small Cap ETF
IndexIQ South Korea Small Cap ETF
While the opportunity to invest in a nation's smallest companies is enticing, it is important to remember that some, such as SCIF, TWON and SKOR, are illiquid. As with any illiquid ETF, I would advise conservative investors hold off on playing these particular funds for now until they generate some popularity.
As with large cap emerging market products, there are also products designed to tap into small-cap companies in a number of emerging markets.
SPDR S&P Emerging Markets Small Cap ETF
WisdomTree Emerging Market SmallCap Fund
are two popular options for achieving this task. Year to date, aiming small has paid off.
Both EWX and DGS have managed to outperform large cap products such as
iShares MSCI Emerging Market Index Fund
Vanguard Emerging Market ETF
Emerging markets remain attractive investment destinations for investors wary of the economic storms and market uncertainty wreaking havoc across many regions of the developed world.
However, determining how best to go about gaining exposure to nations such as Brazil, India, China and South Korea can be a tricky task. Small- cap products offer a unique opportunity to tap into the companies which are most heavily influenced by domestic consumers.
-- Written by Don Dion in Williamstown, Mass.
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At the time of publication, Dion Money Management was not long any equities mentioned.
Don Dion is president and founder of
, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.
Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.