SSgA joins in the slicing and dicing of emerging markets by serving up a first-to-market small-cap ETF focused on Asia.
(Updated to add comments from SSgA official.)
State Street Global Advisors today launched a small-cap version of its broader SPDR S&P Emerging Asia Pacific ETF (NYSEArca: GMFS), a first-to-market fund targeting a region that many analysts see as having the greatest potential for growth in the coming years.
The new SPDR S&P Small Cap Emerging Asia Pacific ETF (NYSEArca: GMFS) comes with an annual expense ratio of 0.65 percent, compared with 0.59 percent for the broader and larger-cap GMF.
Kevin Quigg, SSgA’s global head of strategy and consulting for SPDR ETFs, said that the new small-cap Asia fund speaks to investor demand for exposure to the growing Asian middle class in countries such as China. He said GMFS offers an alternative to large-cap emerging market funds, which he says primarily depend on the health of the overall world economy.
“Ten years ago this was a small part of the world economy,” said Quigg, noting that at that time emerging market countries made up 5 percent of the world’s total stock market value, whereas now that number is 13 percent. Another statistic that bodes well for GMFS is the future growth rate for Asia, which is projected to be five times that of advanced countries, Quigg said.
The new fund is one of four small-cap emerging market ETFs that SSgA registered with the Securities and Exchange Commission last summer, and reflects the increasingly granular way fund companies are marketing developing-world investments. As Quigg said, emerging market small-cap funds are seen as a way to gain access the consumption of rising middle classes.
The Small Cap Emerging Asia fund will use sampling strategy to track the S&P Asia Pacific Emerging under USD 2 Billion Index. Countries are eligible for inclusion in the index if they are classified as developing or as emerging. Country classification is renewed annually, according to the fund prospectus.
Each stock in the index is capped at a maximum of 25 percent of the index weight, and the top five stocks are capped at a maximum of 50 percent of the index weight. Countries covered in the index have historically included, among other countries, China, India, Indonesia, Malaysia, the Philippines, Taiwan and Thailand. As of May 31, 2011, the index had 1,321 securities.
The chief risks of investing in emerging markets in the Pacific region include high inflation rates, undeveloped financial services and heavy reliance on international trade, according to the prospectus.
However, Quigg said that to a certain extent the new small-cap Asia fund is insulated from world events.
“It broadens your overall exposure,” he said, “It gives you enhanced diversification as well as absolute return for the asset class, and, because the valuations are very strong, it is less correlated to your global story and more of a local play.”