ETFs: Think Small When Going International (VSS, SCHC, SCZ, DGS, EWX, HAO, SKOR, TWON, SCIF, SCIN, BRF, LATM)
You won’t be surprised when I say the U.S. markets are lousy right now. Can you find niches that are performing well? Sure — I often highlight these for you when I see them. But most U.S. stocks and sectors are going sideways at best. Moreover, I don’t see the situation changing in the near future.
This doesn’t mean you’re stuck in a low-yielding cash account, though. The world is full of opportunity for those who know where to look. Places like South America and Southeast Asia are still growing nicely, despite weakness in the U.S. and Europe.
Today I’ll show you how to follow this theme with an emerging new category of exchange traded funds (ETFs): International small-caps.
The Key to Growth
U.S. investors are familiar with the superior growth potential of small-cap stocks. It just makes sense … the big blue chips are hostage to their own size and scale.
A small technology outfit, for example, can potentially double its earnings easier and faster than General Electric (NYSE:GE) can.
The other side of this coin, of course, is that the small technology outfit is also more likely to go completely out of business. GE is probably not going anywhere — though after what we’ve seen over the last few years we can’t rule out any possibility.
This company-specific risk is why small-cap stocks are more volatile. It’s also a good reason to diversify your holdings across a large number of individual stocks. Small-cap ETFs and mutual funds are an easy way to do this.
Small-caps have another characteristic that is important in an international context. They tend to be less dependent on exports and more exposed to the local economy.
Again, this makes sense if you think about it …
Giant multinational corporations, by definition, do business all over the world. This makes them less cyclical. But it also means they won’t benefit as much from booming conditions in any one place.
Some small companies are very involved in exports, too. But for the most part they tend to do their business locally — or at least in the same country. This means they provide more concentrated exposure to their nation’s economy.
Now, let’s put two and two together:
If international markets are growing faster than the U.S. …
And if small-caps have the most growth potential …
And those same small-caps give you the most direct exposure to foreign economies …
… then doesn’t it make sense to direct your dollars into international small-caps?
Of course! This is just as true now as it ever was. The difference is that with ETFs you now have many more ways to invest in this category.
In fact, I count around two dozen international small-cap ETFs now available. They cover a wide variety of markets: Developed, emerging, Europe, Japan, China and many others.
More such ETFs are coming out all the time. I don’t have room to give you the complete list and it would likely be outdated soon anyway. However, here are a few ideas for you to review:
Vanguard FTSE All-World Ex-U.S. Small-Cap (NYSE:VSS) has the broadest available international small-cap exposure and covers both developed and emerging markets. Like most Vanguard products, it also has a reasonable cost structure.
Schwab International Small-Cap Equity (NYSE:SCHC) and iShares MSCI EAFE Small-Cap (NYSE:SCZ) are both similar, but they focus on just the developed markets.
Incidentally, both Vanguard and Schwab offer free (or very inexpensive) trading commissions for their in-house ETFs via their brokerage affiliates. Fidelity does the same thing with many of the iShares ETFs including SCZ. There are some restrictions, but penny-pinching investors should take note.
WisdomTree Emerging Markets Small-Cap Dividend (NYSE:DGS) and SPDR S&P Emerging Markets Small-Cap (NYSE:EWX) exclude the developed markets like Canada, Japan, and the U.K. and cover the emerging markets small-cap group. This is good because most of the developed market countries are not doing much better than the U.S.
If you’re looking to zero in on small-caps in the hottest Asian markets, you have several good choices. Take a look at …
- Claymore/AlphaShares China Small-Cap (NYSE:HAO)
- IQ South Korea Small-Cap ETF (NYSE:SKOR)
- IQ Taiwan Small-Cap ETF (NYSE:TWON)
- Market Vectors India Small-Cap (NYSE:SCIF)
- EGS INDXX India Small-Cap (NYSE:SCIN)
Finally, let’s not forget about our neighbors to the South. I’ve written before about Market Vectors Brazil Small-Cap (NYSE:BRF). A somewhat broader choice is Market Vectors Latin America Small-Cap (NYSE:LATM).
Some of the ETFs I just listed are new and don’t have much operating history. As always, do your own research to see if they’re a good fit for you before you buy.
New international small-cap ETFs are coming out quickly, so there will probably be even more choices soon. Watch them closely. I bet you will find something to like.
Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.
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