The Guggenheim China Small Cap ETF invests in consumer stocks (28% of its portfolio), domestically-focused tech and internet companies (9%), travel and tourism firms (21%), along with more traditional sectors such as real estate and health care. The 0.75% expense ratio is typical for ETFs that must dig deeper than blue-chip focused funds to build a portfolio.

The Virtuous Cycle
Rising middle classes aren't merely a local theme. Entire regions are entering into a virtuous cycle, as growth in one country stimulates demand among neighbors. One example is Brazil, where its strong growth over the past decade has boosted the economies of Chile, Colombia, Argentina and others. And thanks to its dominant size in South America, Brazil is now home to an increasing number of companies steadily wading into other South American markets.

That trend makes the Market Vectors Brazil Small-Cap ETF (BRF) especially appealing. The ETF tracks an index created by Market Vectors that focuses on Brazilian companies in the smallest 10% of the Brazilian market (using $150 million as the minimum threshold). Consumer stocks make up roughly one-third of the portfolio, while financial and real estate stocks have a collective 24% weighting. The remainder is split between Brazilian manufacturers, utilities and technology firms.  The 0.59% expense ratio is in line with the peer group.

The WisdomTree Emerging Markets SmallCap Dividend ETF (DGS) is likely to be the safest ETF in this category, simply because it holds a huge amount of stocks (550), all of which have a history of stable dividend payments. Such a broad-based approach has led to lower volatility and better total returns than other small-cap funds, according to Morningstar.

Thanks to a relatively long track record of dividend payments, Taiwanese companies make up a hefty 26% of this portfolio. Thailand and South Africa, which also have financial markets that favor dividend payers, each accounts for more than 10% of the ETF's portfolio.

This fund is best suited for taxable investment accounts because dividend payments can be subject to foreign tax withholding, and you can only recoup those funds through an application for an offsetting tax credit against U.S. taxes-which is ineligible in tax-shielded accounts.

The wild price swings in emerging market investing sometimes requires a strong stomach. But the long-term trends are quite positive for these economies, and smaller-capitalization companies are the most direct way to play this trend.
 

David Sterman has worked as an investment analyst for nearly two decades. He was a senior analyst covering European banks at Smith Barney and was research director for Jesup & Lamont Securities. He also served as managing editor at TheStreet.com and research director at Individual Investor magazine.

 

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