Tap In to the Growth -- and the Volatility

 | Oct 31, 2012 | 10:00 AM EDT  | Comments
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Stock quotes in this article:

VWO

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EEM

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dgs

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EWX

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eems

In early October Vanguard announced that, instead of using MSCI indices for its six international-equity ETFs, it would base those funds on FTSE indices – and Vanguard Emerging Market ETF (VWO) is one high-profile ETF that will affected by the change. It means the ETF will no longer include South Korea, as FTSE does not categorize the nation as an emerging market.

As you can well imagine, the change in Vanguard's portfolio won't (and can't) be instantaneous. Gus Sauter, Vanguard's chief investment officer, said in early October that the South Korean holdings will be sold off over a 25-week period.

Plenty of ink has been devoted to comparisons between VWO and the iShares MSCI Emerging Markets Index (EEM) -- which, of course, will continue holding South Korean names. EEM's the top holding is Samsung's Korea-traded stock.

While those are behemoths within the emerging-market ETF universe, small-cap emerging-market funds offer exposure to growth upstarts. Along with that growth potential, however, investors take on added volatility risk.

An emerging-market ETF that often sneaks under the radar is the WisdomTree Emerging Market Small Cap Dividend Fund (DGS). This is a holding at my firm, Portfolio Asset Management.

The ETF is pegged to its eponymous index. The top five countries, in terms of holdings, are Taiwan, South Korea, Thailand, Malaysia and Brazil. This fund has advanced 10.18% year to date, a fractionally better performance than that of the Russell 2000 ETF (IWM), and it sports a dividend yield of 3.2%.

An even greater yield, 5.3%, comes from the SPDR S&P Emerging Markets Small Cap Fund (EWX), which corresponds to the S&P Emerging Market Under USD2 Billion Index. Many investors focus on the more prominent large-cap SPDRs, but this fund may be worth a look.

EWX struggled in the second half of 2011, finishing with a yearly loss of nearly 34%. But, so far in 2012, it has climbed 15.13%. Shares closed Friday at $43.44, 1.2% below its 10-week line.

Top country weightings are Taiwan, China, South Africa, India and Brazil. Its expense ratio is 0.65%, just fractionally higher than the DGS' ratio of 0.64%.

There is a bit of tracking error, in terms of sector-allocation drift, between the ETF and its underlying index. The fund's top three sectors are financials, industrials and consumer discretionary. The No. 2 and No. 3 positions are reversed within the index.

While the IWM is the U.S. small-cap bellwether ETF, its sister fund, the iShares MSCI Emerging Markets Small Cap Index Fund (EEMS), is not so well-regarded. It hasn't attracted much in the way of investment, with assets under management of only around $9 million -- and it's a new fund, having launched in August of last year. It tracks the MSCI Emerging Markets Small Cap Index.

Year to date, it has gained 8.25%, lagging some of its emerging-market small-cap counterparts. The top five country allocations are Taiwan, South Korea, China, South Africa and India, and the fund sports a dividend yield of 2.6% -- lower than those of some of its peers.

EEMS closed Friday at the low end of its trading range, below both its 10-week and 40-week averages. That does not bode well for a buy in the near future.

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