The U.S. markets are hitting new all-time highs each passing
day. Led by higher business and consumer confidence, the U.S.
economy grew at the best pace in around two years during the third
quarter. This was further validated by the upward revision to the
quarter's GDP growth to 4.1% from the prior figure of 3.6%.
The series of encouraging news doesn't end here. Most recently the
IMF announced that it would upgrade U.S.'s economic outlook. This
news sent major benchmarks including Dow and S&P 500 upwards.
The bullish sentiment in the U.S. markets seems to be spreading
positive vibes to other markets as well. All the major global
indexes including the leading blue chip index for the Euro zone -
EURO STOXX 50 Index - are trading near five-year highs.
And it is not only confined to the U.S. and European markets. Japan
Nikkei stock index is currently trading near its six-year high.
Behind the Rally
Clearly, small caps were the star performers in this broad based
market rally as loose monetary policy encouraged investors to
invest in higher-risk, higher-growth stocks.
Though the Fed has announced the start of tapering from early next
year, it has indicated that the key interest rate would continue to
remain at a record low for a longer period than what was promised
previously. Thus small caps around the globe are expected to
continue their upward trend.
Small cap stocks are believed to offer more robust earnings growth
opportunities in a growing economy. Considering the fact that they
are thinly traded, this illiquid nature works in favor of the small
cap stocks. Rising revenues and earnings not only fuel investor
demand, but given the limited number of shares of a small cap, it
gives a fillip to the share price as well. (read:
Time for This Small-Cap Value ETF?
Moreover, on the valuation front, small cap stocks are still
considered by many market experts to be attractive relative their
its large cap counterparts. After a huge rally this year many blue
chips are currently trading at expensive P/E and P/B levels.
Given the above factors, and considering the fact that smaller
companies generate higher risk adjusted returns than large caps, a
look at this top ranked foreign small cap ETF could be a good way
to target the best of this segment. One way to find a top ranked
ETF in the small-cap value space is by using the Zacks ETF Ranking
system (read: Zacks ETF Rank Guide). (read: all the
About the Zacks ETF Rank
The Zacks ETF Rank provides a recommendation for the ETF in the
context of our outlook for the underlying industry, sector, style
box or asset class (see all the Zacks ETF Categories here).
Our proprietary methodology also takes into account the risk
preferences of investors. ETFs are ranked on a scale of 1 (Strong
Buy) to 5 (Strong Sell) while they also receive one of three risk
ratings, namely, Low, Medium or High.
The aim of our models is to select the best ETFs within each risk
category. We assign each ETF one of the five ranks within each risk
bucket. Thus, the Zacks ETF Rank reflects the expected return of an
ETF relative to other products with a similar level of risk.
For investors seeking to apply this methodology to their portfolio
in the small-cap value space, we have taken a closer look at the
top ranked SCZ. This ETF has a Zacks ETF Rank of 1 or 'Strong Buy'
and is detailed below: (read: 3
Top Ranked Mid Cap Value ETFs in Focus
SCZ in Focus
Launched in Dec 2007,
iShares MSCI EAFE Small-Cap ETF
) tracks the MSCI EAFE Small Cap Index. The index seeks to measure
the performance of small cap stocks within the developed market
space. However, the index doesn't represent U.S. and Canadian
With a huge asset base of $3,018.3 million, SCZ is the most popular
ETF within the foreign small and mid cap equities.
The product holds a large basket of 1312 small cap stocks.
The ETF is well diversified among individual stocks, with only its
top holding having an exposure of 1.33%, while none of the other
individual stocks occupies more than 0.38% of total assets.
Blackrock FDS III, Ashtead Group plc and Mondi plc occupy the top
In terms of sectors, Industrials (22.84%) takes the top spot,
closely followed by Financials (20.18%) and Consumer Discretionary
From a country perspective, Japanese firms dominate the portfolio
at 26.40%, succeeded by United Kingdom (22.69%) and Australia
(6.53%). Other countries such as Germany, Switzerland, Sweden,
Italy, France and Hong Kong get single-digit exposure.
Not only is the fund the most popular within its category by asset
size, it is also the best in terms of performance. The product has
beaten many of the titans in the category returning 25.44% in the
year-to-date frame and a clocking massive 135.82% during the last
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ISHARS-MSCI SC (SCZ): ETF Research Reports
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