Under The Hood: Big Country Small-Caps

The exponential growth of the exchange-traded products business has created more choices for investors. That is a good thing. One potential downside of that growth is that not every new ETF or ETN that comes to market can be completely original.

The ETF industry has long been known for its "me too" funds, or those products that bear a striking resemblance to an older, more established fund. This scenario has created more than a few ETF rivalries. Some are noteworthy such as the Vanguard MSCI Emerging Markets ETF (NYSE:VWO) and the iShares MSCI Emerging Markets Index Fund (NYSE:EEM).

Other ETF rivalries do not draw that much attention and it is by virtue of the fact that one of the funds in the equation is not garnering much attention itself. Still, these comparisons can be instructive for investors, particularly when it comes to laser-focused concepts in the ETF world.

That is the case with the IndexIQ Canada Small-Cap ETF (NYSE:CNDA) and the newly minted iShares MSCI Canada Small Cap Index Fund (BATS: EWCS). As CNDA has the first-to-market advantage, it is the more widely known Canada-small cap play, so let's go under the hood with the iShares MSCI Canada Small Cap Index Fund.

EWCS is just like many of the new small-cap market ETFs that have come to market this year in that it has been slow to gain assets. In the case of EWCS, it had just $4.8 million in assets under management at the close of trading on September 26.

Like its large-cap counterpart, the $4.3 billion iShares MSCI Canada Index Fund (NYSE:EWC), EWCS is reflective of the Canadian economy. That means a large combined weight to energy and materials names. In the case of EWCS, the ETF allocates more than 55 percent of its weight to those sectors, even more than the 46 percent allocated by EWC.

EWCS features a 14 percent weight to financials, well below the 33 percent EWC devotes to that sector. Not surprisingly, EWCS trades at a higher valuation than EWC does, though not by much. The small-cap fund's price-to-earnings ratio is 22.56 and its price-to-book ratio is 2.31, according to iShares data. EWC has a P/E ratio of 19.38 and price-to-book ratio of 2.23.

Since its late January debut, EWCS total returns are bleak as the fund is down 5.1 percent. However, the past 30 and 90 days paint a different picture as the ETF is up almost 4.3 percent and 15 percent, respectively, over those time frames.

In the past three months, EWCS has outperformed EWC by nearly 110 basis points. As for its rivalry with CNDA, EWCS is lagging over the past 90 days, but is the winner on a year-to-date basis.

Time will tell if the market can sustain two small-cap ETFs tracking Canadian equities. For now, EWCS has shown it is valid way of playing strength in Canadian stocks, particularly when investors embrace risk. Those investors just have to find their way to realizing EWCS even exists.

For more on small-cap ETFs, click here.

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