Recent market gyrations resulting from worries over the end of
cheap dollars and a slew of downbeat economic data in the U.S. have
shaken investor confidence in the U.S. equity markets. This has
compelled them to seek alternative and promising investment
Amid such a scenario, foreign small cap stocks emerged as winners
easily outpacing their large cap counterparts to start 2014. In
fact, the MSCI EAFE small-cap index grew about 29.3% in 2013
against 22.8% return offered by its larger cousin the MSCI EAFE
index, showing investors clear attention on the smaller part of the
The trend is continuing this year, as evident from iShares
MSCI EAFE Small-Cap ETF
) gain of 2.8% so far this year versus a gain of 1.7% in the
iShares MSCI EAFE ETF
) in the same time frame.
All large-cap foreign funds were in red so far this year, as
investors flee these types of securities. The foreign small-caps
also returned better than the S&P index as marked by a 0.8%
SPDR S&P 500 ETF (
's share prices. This pushes us to delve into what exactly is
pushing the foreign small-cap rally (read:
3 Low Risk ETFs for a Stormy Market
Behind the Foreign Small-Cap Rally
Normally, smaller companies pick up faster than the larger ones in
a growing economy. With more focus on the domestic segment, smaller
firms are poised to surge in a trending market against larger
counterparts which generally have more global exposure.
Being more focused to the global economy, large-caps are often
highly vulnerable to global shocks thus limiting the scope for
. As a result, a pure resurging international exposure can best be
achieved via these pint-sized securities.
If these were not enough, investors should note that, these
often-ignored tiny stocks are normally illiquid in nature thanks to
their weak trading volume. Thus, a limited number of shares makes
it more difficult for worried traders to easily sell at a good
price, promoting long term investment (read:
Top Ranked Foreign Small Cap ETF in Focus
Is there Any Preference for Geographies?
Probably yes. 2013 can easily be tagged as the year for developed
market resurgence with the Euro-zone's stock index - EURO STOXX 50
Index - reaching a 5-year high, Japan Nikkei stock index hitting
6-year high and the U.S. striking new all time highs day in, day
out. On the contrary, most of the emerging markets are facing
weakness thanks to the 'Fed Tapering concern' and the
resultant currency slump.
So, quite expectedly, the small-cap ETFs that have gathered immense
investor interest lately are inclined toward developed
markets. In the year-to-date frame, two Canada-based ETFs
IQ Canada Small Cap ETF
iShares MSCI Canada Small Cap Index Fund
) have gained 6.5% and 2.9%, respectively, the highest in the
foreign small and mid cap equities space. Both the funds
currently have a Zacks ETF Rank #3 (Hold).
The duo soared on the back of accelerating growth in Canada.
Notably, Canadian GDP stepped up in 3Q13
to its best pace
in about two years. The Bank of Canada now expects as much as
2.3% growth rate
for 2014. So these Canada ETFs offer potential for the near term.
However, for investors who don't want to be bound by a single
country and look for a diversified exposure in various
high-potential markets, we have highlighted a handful of the
small-cap international ETF options which can offer decent returns
in this rocky market environment:
iShares MSCI EAFE Small-Cap ETF
This ETF targets the small cap segment of the developed market
space. This is done by tracking the performance of the MSCI EAFE
Small Cap Index. The fund is the most popular choice in the space
amassing $3.3 billion in AUM.
Holding about 1,311 stocks in its basket, SCZ is highly represented
by Japan (25.8%) and the U.K. (22.96%) with Australia taking a
distant third position (6.4%) (read:
Time to Bet on the British ETF?
Putting just 3.61% assets in the top-10 holdings, SCZ eliminates
company-specific concentration. Expense ratio comes in at 0.40%.
SCZ is up 29.2% in 2013 and 2.8% so far this year.
Vanguard FTSE All World ex-US Small-Cap ETF (
VSS - which tracks the FTSE Global Small Cap ex US Index - invests
about $1.7 billion in assets in its 3,129-stock portfolio. The fund
has its greatest exposure in the U.K. (18.6%) closely trailed by
Canada (12.5%) and Japan (11.3%). Europe consists of about half of
its portfolio (read:
Is Another Great Year Ahead for Japan ETFs?
VSS has minimal concentration risk as it invests as low as 3.2% to
its top-10 holdings. It is also a low cost option charging only 25
bps in annual fees. The fund returned about 10.6% in 2013 and 4.3%
year to date. VSS currently has Zacks ETF Rank #1 (Strong Buy).
FTSE Developed Small Cap ex-North America ETF (
This iShares product, though returned greatly (27.35%) in 2013 and
also advanced 2.6% year to date, remains unloved by investors in
its six-years of being on the market. IFSM has garnered $53.7
million in assets invested in 1,153 securities.
Its expense ratio is higher at 50 bps. Geographic exposure wise,
U.K. takes the largest allocation 26% followed by Japan (16.5%) and
Germany (6.82%). Like the other two, IFSM also bears minimal
concentration risk with only 4.71% put in the top 10 holdings.
All these aforementioned ETFs are well exposed to the
fast-recovering economies like the U.K., Japan and Germany. These
funds should go a long way provided the underlying nations witness
upbeat economic releases.
As a caveat, investors should note that, VSS and IFSM are
susceptible to the movement in foreign currencies which might eat
up profits (in case of adverse translation) when converted to
American currency, but we are liking these picks as solid
international ETFs which can hold up well this year (read:
Inside the New Currency Hedged ETFs from
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IQ-CANADA SC (CNDA): ETF Research Reports
ISHARS-EAFE (EFA): ETF Research Reports
ISHARS-MS CDASC (EWCS): ETF Research Reports
ISHARS-DV SC EX (IFSM): ETF Research Reports
ISHARS-MSCI SC (SCZ): ETF Research Reports
VANGD-FA -US SC (VSS): ETF Research Reports
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