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Are Emerging Market Small Cap ETFs Safer Than U.S. Small Cap ETFs?

06 May 2014 at 4:07 pm by Gary Gordon     Bookmark and Share    Follow EtfExpert on Twitter

When U.S. stocks have struggled in 2014, the pattern has had a familiar ring to it. Small-caps have fallen harder than large-caps. Growth-oriented equities have dropped more precipitously than value-oriented equities. Meanwhile, consumer Internet assets have jumped off the proverbial cliff.

SOCL is Unfriendly

For those who choose to monitor these sorts of unfriendly patterns, the price of Global X Social Media (SOCL) is well below key moving averages. The 50-day trendline’s imminent crossing below the 200-day trendline will constitute the dreaded “death cross.” Meanwhile, the Internet-related investment is in bear market territory; SOCL is roughly 26% below its record peak in March.

Perhaps ironically, the predominant chatter in the financial world is centered on the eventuality of China’s largest e-commerce site, Alibaba, going public. Where is the discussion about the struggles that Internet stocks have endured lately? Like Global X Social Media (SOCL), PowerShares NASDAQ Internet (PNQI) and China Guggenheim Technology (CQQQ) are down 17% and 18% respectively from their March high points.

The same type of disdain for non-cash flow producing “dot-coms” that occurred in March of 2000 also occurred in March of 2014. While that should cause investors to reflect on the similarity, there are plenty of noteworthy differences. Interest rates were sky-high in 2000 whereas they are remarkably low today. Additionally, the mutual fund industry has not been dragged into chasing the NASDAQ by over-weighting “new tech” in fund portfolios. Moreover, dollars under ETF management are currently diversified across a wider range of asset types, including emerging market stocks in Vanguard Emerging Market (VWO), precious metals in SPDR Gold Trust (GLD) and real estate investment trusts in Vanguard REIT (VNQ). In essence, the NASDAQ’s super-sized influence in 2000 had a lot to do with a rational stock price reversion. U.S. stocks might take cues from the NASDAQ today, though they would not be slaves to “New Economy” thinking.

In my estimation, the most troubling development is occurring in small companies. I may be able to dismiss the impact of Internet stocks on the broader market. However, a significant proxy for small-cap investing, iShares Russell 2000 (IWM), has fallen below its long-term moving average (200-day). The last time IWM breached its trendline was back in November of 2012.

IWM 200

U.S. small caps may have a difficult time competing with the perceived safety of various alternatives for one’s money. Treasury bonds and the majority of income producers have greater relative strength, definitive technical uptrends as well as better year-to-date returns than U.S. small stocks. What’s more, stocks with lower price-to-earnings (P/E) and lower price-to-cash flow (P/C) ratios have been garnering attention as well.

For instance, few had been looking favorably upon a perennial loser like Market Vectors India Small Cap (SCIF) until nine months ago. Now SCIF has technical analysts and fundamental fanatics both excited. On the fundamental front, SCIF has a price-to-earnings of 11.3 and a price-to-cash flow of 4.5. The Russell 2000? According to Birinyi Associates, the trailing 12-month P/E is over 100. SCIF also has a more favorable technical picture than IWM, the Russell 2000 proxy.

SCIF ETF

Not all small-caps around the world are catching a bid. Yet even Market Vectors Brazil (BRF) may be getting off the mat. There may be a degree of safer equity investing in an asset with a P/E of 10.7 coupled with a favorable technical turn.

BRF 50 200

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Disclosure Statement:¬†ETF Expert is a web log (‚ÄĚblog‚ÄĚ) that makes the world of¬†ETFs easier to understand. Gary Gordon, MS, CFP is the president of¬†Pacific Park Financial, Inc., a Registered¬†Investment Adviser with the SEC. Gary Gordon, Pacific¬†Park Financial, Inc., and/or its clients may hold positions in the¬†ETFs,¬†mutual funds, and/or any¬†investment asset mentioned above. The commentary does not constitute individualized¬†investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of¬†exchange-traded products compensate¬†Pacific Park Financial, Inc. or its subsidiaries for advertising at the¬†ETF Expert web site.¬†ETF Expert content is created independently of any advertising relationship.

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