IndexIQ, the ETF company behind a number of small-cap equity and hedge fund replication products, pushed out another first-to-market idea this week. The new IQ Emerging Markets Mid Cap ETF (EMER) will offer exposure to an index comprised of mid-cap stocks listed and domiciled in emerging markets, giving investors another tool to fine tune the portions of their portfolios dedicated to the developing world. The new fund marks the 15th product for the issuer and the second fund targeting the mid-cap space. Earlier this year, IndexIQ pioneered the first ETF to focus on mid-cap Japanese stocks, the IQ Japan Mid Cap ETF (RSUN).
The new ETF seeks to replicate the IQ Emerging Markets Mid Cap Index, a float-adjusted market cap weighted benchmark comprised of the mid capitalization sector of publicly traded companies domiciled and primarily listed on an exchange in the emerging markets. The fund is most heavily weighted towards firms in Taiwan (22.8%), South Korea (13%) and South Africa (11.7%), although 20 countries in total are represented in the fund. The expense ratio for EMER comes in at 0.75%, a little higher than the Emerging Markets ETFdb Category average of 0.67% but in line with the more specialized products in the space.
EMER maintains a relatively deep portfolio, with close to 350 securities in total. And the balance of the mid-cap ETF is impressive as well; no one company makes up more than 1% of the total assets while no single sector takes up more than 20% of the portfolio. Consumer discretionary and financials both make up more than 18% of total assets, and are closely trailed by industrials (15.9%) and materials (13.3%) sectors. The smallest weights from a sector perspective go to healthcare, transportation and utilities. Also given a small weight is energy, highlighting one of the most significant differences between large-cap and mid-cap products. The energy sector generally receives large allocations in many international equity ETFs, since oil companies have a tendency to be among the most valuable companies in a given economy.
Benefit of Mid Cap Securities
The launch of EMER continues a trend toward more precision and targeted exposure in the ETF lineup. For many years now ETFs have offered exposure to virtually every major world economy, whether it be through a single-country product, regional fund, or a more broad based ETF focusing on emerging or developed economies. But historically, access to many international markets has been binary. Either investors achieved it though products dominated by mega caps, or they didn’t. Innovation in the space has given investors more and more options for accessing international markets; there are a handful of products offering exposure to small cap international stocks, many of which are offered by IndexIQ (CNDA, which focuses on small cap Canadian stocks, is one of the company’s largest products).
|Emerging Markets ETFs|
|Large Cap||VWO, EEM, AGEM|
|Small Cap||EWX, DGS|
Mid caps are often overlooked by investors, and there are few ETFs offering exposure to mid-cap international stocks. There are several ETFs offering exposure to large-cap emerging market stocks, and a handful that focus on small caps as well (such as EWX and DGS). Research suggests that mid caps can offer returns and volatility between their large cap and small cap counterparts, a risk/return profile that may appeal to some investors or that may be useful as a means of rounding out emerging markets exposure.
“Just as it is important for investors to diversify across capitalization spectrum in their domestic portfolios, the same holds true for investors allocating to emerging markets,” said Adam Patti, CEO of IndexIQ in a recent press release. “Prior to EMER, only the large- and small-cap sectors of the emerging markets landscape were available to ETF investors. That changes today as we bring out this first-of-its-kind product to allow investors to access the growth potential of the emerging market mid-cap sector in a highly-liquid, highly transparent way."
Disclosure: No positions at time of writing.
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