May 6, 2019

Construction Issues in Emerging Market Small Cap Indexes

Increasingly, investors are looking to add emerging market small-cap equities as a separate allocation in their portfolios. This decision is to some degree motivated by the desire to capture a “small-cap premium,” the well-known theoretical notion that smaller-capitalization stocks show persistent outperformance versus large-cap stocks.

While the definition of small is unambiguous in a single-country context, its meaning becomes less precise in a multicountry setting—are you looking to invest in the smallest companies in each emerging market country or the smallest companies in the entire emerging markets universe? The answer to this seemingly simple question can have significant implications as to the exposure you’re attempting to target.

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