Van Eck, the New York City-based ETF issuer known for its lineup of commodity and emerging market funds, continues to fill its product pipeline with ideas. The company recently disclosed details for three new ETFs targeting European stock markets, with the filings for two German funds and one Russian ETF. Details on the proposed funds were scarce, but it is clear that the new funds are unique from anything currently on the market:
- German Mid Cap ETF: This proposed fund will seek to track the Market Vectors Germany Mid-Cap Index, which is a benchmark of companies in the mid-cap space that are domiciled in Germany or generate at least 50% of their revenues in Germany.
- German Small Cap ETF: This proposed fund would track the Market Vectors Germany Small-Cap Index, a benchmark offering exposure to companies in the smallest capitalization threshold. The index will track companies that are either based in Germany or derive at least 50% of their revenues from the country.
- Russian Small Cap ETF: The only proposed emerging market fund on the list, this ETF would implement a similar strategy as its German counterparts, tracking an index of Russian companies that are either based in Russia or derive at least 50% of their revenues from the nation.
Beyond the descriptions of the underlying indexes, the filings were light on details; no information on expense ratios, tickers, or the composition of the holdings was disclosed [check out our ETF Screener for more options on European ETFs].
If approved, the funds would come into the increasingly crowded European ETF space but would fill a niche that is surprisingly empty in the ETF world. Although many small and mid cap products exist for the U.S. market, funds tracking individual foreign markets are rare–most international stock ETFs are dominated by large cap companies. Currently, country specific ETFs tracking small cap markets are only available for those considering investing in Brazil, Canada, Australia, Taiwan, South Korea, China, and Japan, leaving much to be desired in the space.
This is especially peculiar given that both Germany and Russia are, by some measures, two of the ten largest economies in the world. Pure play ETF options for German equities are limited to EWG, while the three Russia ETFs currently on the market are dominated by large cap stocks. Russia is the only member of the BRIC bloc that doesn’t have a devoted small cap ETF; Brazil (BRF, EWZS), China (HAO, ECNS), and India (SCIF, SCIN) all have multiple options [use the ETF Country Exposure Tool to find all equity ETFs with exposure to a particular country].
Small Cap Difference
Investors are beginning to warm up to small cap securities given their impressive performance in recent years. Many of the current crop of funds tracking individual countries tend to be heavily concentrated in certain sectors–often financials or energy companies. These firms are usually the largest companies in any given market, meaning that they dominate many international ETFs linked to cap-weighted benchmarks. Investors are also realizing that small caps tend to be more of a “pure play” on individual economies as well. This is largely due to the fact that the largest companies in many foreign markets are multinational firms that often do business in countries around the world. This suggests that they may not be as impacted by local events as their small cap counterparts, making pint-sized companies the preferred way to access foreign markets for many investors. Last year, the discrepancy between large and small cap ETFs was considerable in many cases [see the For ETF Investors, The Details Matter].
|Region||Large Cap||Small Cap|
|Emerging Markets (EEM, EWX)||16.5%||23.5%|
|Developed Markets (VEA, SCZ)||8.3%||21.5%|
|China (FXI, HAO)||3.5%||14.2%|
|Brazil (EWZ, BRF)||4.2%||24.1%|
|Japan (EWJ, SCJ)||13.6%||19.1%|
Van Eck Success
Van Eck has generally experienced tremendous success with new ETF products, as the most recent additions to the company’s lineup have gained traction with investors rather quickly. In 2010 Van Eck launched six new ETFs, which finished the year with aggregate assets of more than $500 million. Time will tell if the proposed Russia and Germany ETFs continue that track record.
|Latin America Small Cap ETF||LATM||4/6/2010||$26.0|
|Emerging Markets Local Currency Bond ETF||EMLC||7/22/2010||$195.7|
|India Small Cap ETF||SCIF||8/23/2010||$53.7|
|Rare Earth/Strategic Metals ETF||REMX||10/28/2010||$236.8|
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Disclosure: No positions at time of writing.