Alternatives to IndexIQ’s closing emerging markets mid-cap ETF

Dec 5th, 2012 | By | Category: Equities

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IndexIQ, a US-based provider of niche exchange-traded funds (ETFs), has disclosed plans to shut down the IQ Emerging Markets Mid Cap ETF (EMER). With less than $2 million in assets, it appears the fund is just too small to justify its existence.

Alternatives to IndexIQ’s closing emerging markets mid-cap ETF

Emerging market mid-cap companies are more closely correlated to the performance of their domestic economies.

The fund is one of 14 ETFs offered by IndexIQ and represents less than 0.5% of the provider’s assets.

The fund’s final day of trading on the NYSE Arca will be December 18, 2012. Between the final day of trading and the liquidation date, December 28, 2012, shareholders may only be able to sell their shares to certain broker-dealers.

Shareholders who have not sold their shares by this date will have them automatically redeemed and will receive a cash distribution equal to the net asset value, inclusive of remaining income and capital gains.

By targeting the mid-capitalisation sector of publicly traded companies in emerging markets, the fund provided access to a fairly niche market segment that is otherwise hard to reach. And while the fund proved unsuccessful at accumulating assets, it nonetheless offered an interesting proposition.

As many larger emerging market companies have become increasingly active in overseas developed markets, their performance has become more highly correlated with the overall global economy, reducing some of the benefits of investing in emerging markets. Emerging market mid-caps, by contrast, on the whole, remain more exposed to their domestic economies, which are typically enjoying higher growth.

Therefore, for investors seeking greater diversification and higher potential growth opportunities, the IndexIQ fund had many attractions. Fortunately for investors, there are alternatives to consider once the fund closes.

First up is the Guggenheim MSCI Emerging Markets Equal Weight ETF (EWEM). This fund tracks the MSCI Emerging Markets Equal Weighted Index, which is an equally-weighted version of the MSCI Emerging Markets Index. Because all constituents are given the same weight, the weighted median market cap of constituents is $4.5 billion – broadly mid-cap range and significantly less than that of the parent market-cap index. Essentially this fund overweights small and mid-cap companies and underweights large-caps.

Next up is the EGShares Emerging Markets Core ETF (EMCR). Like the Guggenheim fund, this also follows an equally-weighted index. Based on the S&P Emerging Markets Core Index, the fund tracks the performance of up to 116 leading companies determined to be representative of all industries domiciled in emerging market countries. The equal-weighted approach once again means that small and mid-cap companies are overweighted while large-cap companies are underweighted, thus giving the fund a mid-cap bias.

Moving down the size scale is the SPDR S&P Emerging Markets Small Cap ETF (EWX). This fund tracks the S&P Emerging Markets Under USD2 Billion Index, which represents the small-capitalisation segment of emerging countries included in the S&P Global BMI Index. Fund constituents have an average market cap of $1.1 billion, compared to an average market cap of $32 billion for the S&P Emerging BMI Index. This is on the border of the mid-cap to small-cap range. Encouragingly, the fund has $660 million in assets and so is unlikely to close!

Finally, there is the iShares MSCI Emerging Markets Small Cap Index ETF (EEMS), though this is an out-and-out small-cap fund. The fund is diversified across industry groups and targets companies with a market cap between $200 million and $1.5 billion. The average constituent market cap is $879 million.

The above funds are listed on US exchanges.

UK-based investors looking to access this segment of the emerging market universe have a choice of two funds, both tracking the MSCI Emerging Markets Small Cap Index: the iShares MSCI Emerging Markets Small Cap (IEMS) and the SPDR MSCI Emerging Markets Small Cap ETF (EMSM). These funds are listed on the London Stock Exchange and have assets of £242 million and £13.2 million, respectively. There are currently no funds offering access to the mid-cap sector.

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