Some small-cap ETFs, particularly emerging markets funds, have shown noticeable signs of weakness in recent days. That is not the case for all small-cap ETFs and an arguably surprising candidate is showing signs of leadership.
Accounting for Thursday's gain of almost 1.3 percent, RSXJ is now up nearly three percent year-to-date, a performance that easily tops comparable BRIC small-cap ETFs such as the Market Vectors Brazil Small-Cap ETF (BRF) and the Market Vectors India Small-Cap ETF (SCIF). RSXJ has also easily outpaced the Guggenheim China Small-Cap ETF (HAO) since the start of the year.
With just $10.2 million in assets under management and average daily volume below 15,100 shares, RSXJ is often overlooked in favor of large-cap funds in the Russia ETF conversation. ETFs have fed demand for Russian large-caps, leading to a widening valuation chasm between the countries large and small market value stocks, according to JPMorgan research.
That market value should not diminish the allure of RSXJ because Russian small-caps have their own virtues relative to their larger peers. Indeed, investing in a Russia ETF usually means significant exposure to the energy sector and that works when oil prices rise. However, RSXJ is more diverse than Russian large-cap ETFs.
RSXJ has an 18.1 percent allocation to the energy sector. That can be viewed as enough to give the ETF some correlation to rising oil prices, but not so much that the fund should suffer mightily if oil prices experience significant price retrenchment. On the other hand, the Market Vectors Russia ETF (RSX) devotes almost 43 percent of its weight to energy names, many of which are state-controlled.
That brings up another point in favor of RSXJ, which is that as a small-cap fund, it is not excessively weighted to state-run firms. For example, the ETF has just a 0.2 percent weight to utilities stocks, arguably Russia's most heavily relegated sector and that is not known for stable dividends or an ability to generate free cash, as JPMorgan noted.
In an effort to attract more foreign investment, is legitimately working to diversify its economy away from energy dependence to greater domestic consumption. Should those efforts bear fruit in the near-term, RSXJ could benefit due to its combined 18 percent weight to discretionary and staples names.
One reason may be performing well this year is that investors are buying according to Market Vectors data. The SPDR S&P Emerging Markets Small Cap ETF (EWX) has a P/E ratio of almost 13 and a price-to-book ratio of nearly 1.2.
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