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 Top Ranked ETFs).
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 (SCZ) 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 companies.
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 three positions.
In terms of sectors, Industrials (22.84%) takes the top spot, closely followed by Financials (20.18%) and Consumer Discretionary (18.93%).
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 five years.
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Zacks Investment Research
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report