Emerging Markets Small-Cap ETFs Rebounding

Back in the go-go days for emerging markets ETFs, small-cap funds soared in terms of popularity, number of choices available to investors and, yes, returns.

For example, 2010 was an excellent year for diversified, large-cap emerging markets ETFs. That year, the Vanguard Emerging Markets ETF (NYSE:VWO) and the iShares MSCI Emerging Markets ETF (NYSE:EEM) rose an average of 18 percent.

The SPDR S&P Emerging Markets Small-Cap ETF (NYSE:EWX) was even better in 2010, soaring 23.5 percent. Assuming the current rebound for emerging markets ETFs has staying power, many market participants are likely to keep focusing on funds like VWO and EEM.

However, they would do well to remember that when developing markets rally in earnest, small-caps usually participate in that upside. The following ETFs indicate that may already be happening.

WisdomTree Emerging Markets SmallCap Dividend Fund (NYSE:DGS) Along with EWX, the WisdomTree Emerging Markets SmallCap Dividend Fund is one of the pillars of the small-cap ETF community for developing world stocks. Like so many emerging markets ETFs, DGS has struggled this year, but since August 26, the fund was up three percent entering Monday's trading session.

In addition to an almost jaw-dropping 5.81 percent 30-day SEC yield that is twice the current yield on 10-year U.S. Treasuries, there is something else significant about DGS: Its country allocations. Taiwan and South Korea, two of the lowest beta emerging markets, combine for 37 percent of the of the fund's weight. Downtrodden Thailand, Indonesia and India combine for just 12 percent.

The recent rally for DGS has taken the ETF above its 50-day moving average and a gain of another four percent would get the fund above its 200-day line, which should be a bullish sign.

EGShares India Small Cap ETF (NYSE:SCIN) It is fair to say India, the "I" in the famous BRIC acronym, has gotten its share of negative press this year and deservedly so. Indian equities, still not yet all that cheap relative to historical standards, have been pummeled by a sour combination of inflation, slowing economic growth a weak currency and a widening account deficit.

Then there is the view, arguably an accurate one, that Indian policymakers have largely been ineffective in their efforts to shore up Asia's third-largest economy. All of that is to say India ETFs have a long way to go to restore investors' confidence.

However, foreign investors have not been pulling cash from Indian stocks at the pace that many would surmise given the tumult in the country's equity markets. In fact, inflows to Indian stocks this year are among the best in Asia and have been "sticky," particularly when considering how rocky the market has been.

SCIN is an interesting play not just because the ETF is up nearly 12 percent in the past week. The fund's 27.4 percent allocation to financial services names indicates it will benefit from government efforts to shore up the banking system.

SCIN's 12.7 weight to health care is a plus because that sector is not heavily exposed to a weak rupee and an almost 20 percent weight to consumer stocks gives the fund some leverage to any recovery in the Indian consumer story.

Alternatives: Market Vectors India Small-Cap ETF (NYSE:SCIF) and the iShares MSCI India Small-Cap ETF (BATS: SMIN).

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Disclosure: Authors is long DGS.