Van Eck announced the latest addition to its fast-growing ETF lineup today, rolling out a fund that offers exposure to small cap German companies. The Market Vectors Germany Small-Cap ETF (GERJ) will seek to replicate the Market Vectors Germany Small-Cap Index, a benchmark that includes small cap companies listed in Germany or that generate at least 50% of their revenues in Germany.
Prior to the launch of GERJ, the only “pure play” Germany ETF available to U.S. investors was the iShares MSCI Germany Index Fund (EWG). That product, which has close to $3 billion in assets, consists of about 50 large cap German companies; the largest allocations go to Siemens, BASF, Allianz, Bayer, and Daimler. The median market cap of the underlying index was more than $11 billion at the end of 2010, and the smallest company in the MSCI Germany Index has a market cap of $2.5 billion. The launch of GERJ gives investors another option for tapping in to the world’s fourth-largest economy.
Under The Hood Of GERJ
The German economy has been one of the few bright spots in developed Europe, a spot of relative stability on an otherwise tumultuous continent. Germany’s economy is expected to expand by 2.3% this year, down from an impressive 3.6% expansion in 2010. Germany is powered by a focus on high quality manufacturing, and has historically relied on exports to power a significant part of its growth; Germany trails only China in terms of total exports. Industrials account for the largest individual sector allocation within GERJ, making up 35% of holdings. Other large sectors include technology (16%) and consumer discretionary (15%). Energy, utilities, consumer staples, and telecom combine to make up less than 4% of assets. According to Van Eck, there are 95 securities in the underlying index, which maintains a P/E ratio of approximately 25x.
Germany has been among the best performers in the G-7 in recent years, and small and mid cap firms account for a significant portion of both total GDP and the German workforce.
Small Cap ETF Boom
As the ETF industry has grown by leaps and bounds in recent years, investors have gained ways to access many of the world’s largest economies. But the majority of international equity ETFs are linked to capitalization-weighted indexes, and as such have a tendency to be dominated by large cap securities. That introduces a few biases into these products, including a frequent tilt towards the energy and financial sectors. It also results in a portfolio of multi-national companies that happen to be listed in a certain market but often generate revenue around the world. The top holdings of EWG illustrate this effect; Siemens, Bayer, and Daimler generate big portions of their revenue outside Germany.
Small cap companies often generate a greater portion of earnings in their home market compared to their large cap counterparts, and as such are often seen as more of a “pure play” on local consumption and the local economy. While large cap and small cap ETFs focusing on the same economy often show strong correlations, the return differentials between these products can be significant [see For ETF Investors, The Details Matter]. A number of country-specific small cap ETFs have popped up in recent years, and many have attracted significant interest from investors:
|Small Cap International ETFs|
|Japan||DFJ, JSC, SCJ|
|Source: ETF Screener|
Disclosure: No positions at time of writing.