With geo-political tension abating for the time being, U.S. markets are again trading close to their all-time highs. An improving labor market, housing data and rising consumer confidence are some of the factors leading the market higher.
While this positive sentiment is definitely leading to inflows in stocks within the home country, other developed and emerging market countries are also picking up (3 Emerging Market ETFs Off to a Great Start in 2014).
The worst of the Euro crises is now behind us with the Euro zone gradually getting back on track. The Euro region grew at a modest pace of 0.3% in the final quarter of 2013 as compared to 0.1% growth in the preceding quarter.
Among other factors, rising exports are contributing to the gradually strengthening recovery. Euro zone’s trade surplus during 2013 almost doubled to 153.8 billion euros from 79.7 billion euros in 2012.
The U.K. is also doing quite well in terms of recovery. The economy grew by 0.7% in the final quarter of 2013 on the back of improved business sentiment.
Business sentiment during the fourth quarter in the U.K. rose 2.4% from the previous three-month period. Moreover, business sentiment in 2013 improved 8.5% year over year. Other sectors and regions are also showing positive growth trends, which can boost the country’s output and employment in the longer run.
Moreover, Canada’s GDP grew at a better-than-expected rate of 2% during 2013. Also, Abenomics has put Japan’s economy back on track (read: Japan ETFs in Focus as BOJ Boosts Loan Programs).
As the global scenario, both in the developed as well as emerging markets, strengthen with time, investors can benefit from investing in an ETF focused on foreign markets.
Moreover, small cap stocks are expected to perform better than the larger ones during a recovering scenario. Small cap companies usually focus more on the domestic segment and as such are expected to reap more of the benefits.
Hence a focus on a top ranked foreign ETF that has broad exposure across developed and emerging markets with a focus on small caps would be the best option to capture the uptrend. Foreign small caps also appear to be quite attractive in terms of valuation as compared to U.S. small caps (read: 3 Foreign Small Cap ETFs Likely to Outperform).
About the Zacks ETF Rank
A look at top ranked World ETFs can be done by using the Zacks ETF Rank. This technique provides a recommendation for the ETF in the context of our outlook of the underlying industry, sector, style box, or asset class. Our proprietary methodology also takes into account the risk preferences of investors as well.
The aim of our model is to select the best ETFs within each risk category. We assign each ETF one of the five ranks within each risk bucket. Thus, a Zacks ETF Rank reflects the expected return of an ETF relative to other ETFs with a similar level of risk.
Using this strategy, we have found one ETF Ranked #1 or ‘Strong Buy’– Vanguard FTSE All-World ex-US Small-Cap ETF (VSS) – which we have highlighted in greater detail below (see all World ETFs here).
Vanguard FTSE All-World ex-US Small-Cap ETF (VSS)
The fund is one of the most popular within the Foreign Small & Mid Cap Equities ETFs. Launched in April 2009, the passively traded fund tracks the FTSE Global Small Cap ex US Index and has amassed $1.8 billion since its inception.
The product holds a large basket of 3123 stocks and is quite well diversified as the assets in the top ten holdings form only 3.3% of total assets. ProSiebenSat.1 Media AG, Travis Perkins plc and Tourmaline Oil Corp. are the top three holdings of the fund.
Region-wise, the fund invests around half of its assets in Europe, while investing 21.4% in the Pacific region and 18.4% in emerging market countries. As such, the fund has the highest allocation to the U.K. (19.3%), followed by 12.4% exposure to Canada and 10.8% to Japan.
As far as sector allocations are concerned, the fund has double-digit exposure to consumer cyclical (18.15%), industrials (18.13%), technology (10.6%) and financial services (10.44%).
With expenses of 25 basis points a year, VSS is one of the cheapest options in its space. The fund added 11.4% in 2013, and has gained 5.96% since the start of the year. The fund also pays a solid dividend yield of 2.63% annually, and it could be a decent choice for investors seeking broad exposure across the small cap market.
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