From the June 2011 issue of Research Magazine • Subscribe!

Going Small in Germany, Russia

New products: German and Russian small-caps

Van Eck Global added the Market Vectors Russia Small-Cap ETF (RSXJ) and the Market Vectors Germany Small-Cap ETF (GERJ) to its lineup.
RSXJ focuses on small stocks in Russia and the fund’s holdings have an average market size of $2.3 billion. GERJ’s underlying index is composed of 95 stocks with an average market size of $1.2 billion.

“We are strong believers in Russia and many other emerging markets and think that large-cap exposure definitely has its place. However, we also believe the best way to gain pure-play exposure to a country’s domestic economy is through smaller companies that derive their revenue primarily from doing business locally,” says Ed Kuczma, emerging markets analyst with Van Eck Global. “Other potential advantages with small caps generally include less political interference, relatively better corporate governance practices, and relatively better protection for minority shareholder interests.”

Russia’s economy has been boosted by strong commodity prices, with gross domestic product expected to expand by 4.3 percent in 2011.

As of mid-April, RSXJ was composed of 35 companies with the largest sector weightings being utilities (18 percent), materials (18 percent) and energy (17 percent).

German stocks are on a tear this year, despite Europe’s sovereign debt woes. Through mid-April, the iShares MSCI Germany Index Fund (EWG) was ahead by roughly 10 percent and 20.66 percent over the past year. EWG holds a basket of 55 German stocks with a median market size of $11.46 billion.

As of early March, GERJ’s underlying index comprised 95 stocks with an average market size of $1.2 billion. The largest industry sectors are industrials, information technology and consumer discretionary.

A substantial portion of Germany’s economy consists of small companies with a history of dominating in specialized industry sectors like machine tools, auto parts, printing presses and electrical equipment. Many of these companies are significant exporters and have allowed Germany to maintain its share of world trade.
GERJ’s net annual expense ratio is 0.55 percent while RSXJ charges 0.67 percent.

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