In addition to the hundreds of new launches, the ETF product pipeline has continued to fill as well. SEC filings have accelerated in recent weeks, with issuers planning a wide variety of additional funds that offer sector-specific exposure to international economies and tools for playing narrow investment themes within the U.S. market. While most of the new products now hitting the market or progressing through various stages of development are designed for investors looking to express a very specific opinion on a sector or region, there are still some bigger, more general stones left unturned.
BRIC ETFs
TickerAUM ($M)% Small Caps
BKF$1,0650.1%
EEB$7420.7%
BIK$5320.0%

One surprising hole in the ETF coverage map is in the BRIC space -- which may seem surprising since there are three ETFs dedicated to the BRIC bloc of Brazil, Russia, India, and China. The "big four" of emerging markets have become a popular investment destination in recent years, as developing economies have emerged as the clear drivers of global GDP growth and the importance of these markets on the world stage has increased significantly. The three dedicated BRIC ETFs -- iShares' BKF, Guggenheim's EEB, and State Street's BIK -- have aggregate assets in excess of $2 billion. While the exposure offered by these markets differs slightly in terms of country allocations and other details, they are similar in that each is dominated by large-cap stocks, with little or nothing in the way of small-cap exposure [How Global Are Global ETFs?].

That feature gives investors to the largest companies in the emerging world, but also introduces some biases to the underlying portfolios. For one, concentration in a small handful of stocks can become significant. For example, the SPDR S&P BRIC 40 ETF (NYSE: BIK) dedicates nearly 10% of its portfolio to Russian energy giant Gazprom, and in total the five largest stocks make up nearly a third of total assets.

Focusing exclusively on large caps also skews the sector breakdown of intentional equity ETFs. Because banks and oil companies tend to be the largest companies in any given market, it isn't uncommon for the energy and financials sectors to make up a big chunk of exposure, with consumer companies, utilities, and other corners of the market afforded minimal allocations or overlooked altogether. Banks and energy companies make up nearly two thirds of BIK's assets, with no inclusion whatsoever of consumer discretionary firms [see holdings of BIK here].

Financial institutions and energy companies are generally more likely to be impacted by broader macroeconomic trends than the health of the local economies where their stocks are primarily listed. Small caps, on the other hand, often get investors "closer to the ground" in that they offer exposure to companies that depend heavily on local consumption and growth of the local economy. That feature helps to explain why many country-specific small cap ETFs have become tremendously popular with investors; BRF has nearly $1 billion in assets, while HAO has raked in close to $350 million [Definitive Guide to BRIC ETFs].

Adding the Small Cap India ETF (NYSE: SCIN) and Russia Small Cap ETF (NYSE: RSXJ) to those names allows for the construction of a piecemeal small cap BRIC ETF, but so far there remains no way to access this asset class through a single ticker. Given increasing interest in small cap stocks as "pure play" options for international equity exposure and the importance of the BRIC bloc to any portfolio, it's tough to imagine that a small-cap BRIC ETF would be anything but a hit with investors.

EWX: Close, But Not Quite
The SPDR S&P Emerging Markets Small Cap ETF (NYSE: EWX) has become a popular tool for investors looking to balance emerging markets exposure across companies of various sizes, but that fund might not offer the degree of pure play exposure some investors want. EWX allocates roughly a third of its assets to Taiwan, a market that is considered to be developed by many investors and is in many ways more similar to the U.S. than it is to the emerging markets of Brazil and China [also see Does South Korea Belong In Your Emerging Markets ETF?]. EWX has more than $700 million in assets, further highlighting the trend towards utilizing small cap companies for international equity exposure.

A small-cap BRIC ETF could have a number of applications for all types of investors. More active traders could embrace such a product as a way to implement a tactical tilt towards the major emerging markets in certain environments, while those with a longer-term focus could use small-cap BRIC exposure to round out the emerging markets portion of a buy-and-hold portfolio. There would be obvious opportunities as a component of a market neutral pairs trade, seeking to capture the return differentials between small-cap and large-cap stocks of the BRIC bloc.

There's no doubt that at least one issuer has such a product in the works (Guggenheim laid the groundwork for a small-/mid-cap BRIC ETF in a filing earlier this year); when the first small-cap BRIC ETF sees the light of day, a warm reception from investors seems likely [see BRIC ETF Investing: Small Cap Edition].

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Disclosure: long BRF.

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