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3 Foreign Small-Cap ETFs to Watch Amid Global Easing - ETF News And Commentary

Zacks Equity Research

International investing has been extremely upbeat since the beginning of this year on a flurry of monetary easing announcements. Most nations across the globe, in Europe or in Asia, came up with the stimulus to boost sagging growth and ward off deflationary threats (read: Global Policy Easing Puts These ETFs in Focus).

Japan is presently pursuing an ultra-easy monetary policy and the European Central Bank (ECB) has launched a QE program with most European nations pursuing a rock-bottom interest rate policy. To be competitive in the export markets, several other key European nations including Denmark, Sweden and Switzerland have introduced native interest rates in recent times and forcefully depreciated their currencies (read: Sweden ETF Up Post Rate Cut & QE

If this was not enough, Australia, Canada, Peru, Egypt, China, India, Turkey and South Korea are also opting for monetary easing. A massive oil price slump in the last nine months, which put a lock on global inflation, has made this possible.

Why Bet on International Small Caps?

Investors should note that small caps are considered the measure of domestic economy. In a growing economy, these pint-sized securities perform the best as these generate most of their revenues from the domestic market. These are less ruffled by global economic concerns (read: Top-Ranked Small Cap ETFs for a Growing Economy).

Though the Fed looks to be supportive by keeping the rates at a rock-bottom level for as long as the economy needs it, sooner or later this year the American central bank will hike rates. Even after the moderation in the growth rate, the U.S. economy is still growing faster than many developed nations across the globe. This makes the international arena the best place for small cap plays.

A wave of cheap money in those international nations will lead to stepped-up economic activities, and rising business and consumer confidence which in turn will benefit their small-cap companies.

Considering the fact that this investing spectrum is thinly traded, the illiquid nature works benignly for 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 boost to the share price as well.

Below are our three selections that should perform favorably in this kind of a global macroeconomic backdrop and could thus be in watch. Investors should note that the following were among the top performers in the foreign small-cap equities ETF space over the last one month.

SPDR S&P International SmallCap ETF (GWX)

This ETF targets the small cap segment of the world (ex-US). This is done by tracking the performance of the S&P Developed Ex-U.S. Under USD2 Billion Index. The fund is one of the popular choices in the space amassing $723 million in AUM.
Holding over 2,200 stocks in its basket, GWX is tilted toward Japan (33.85%) with the U.K. (11.42%) coming in a distant second. South Korea takes the third position with 8.7% exposure (read: Nikkei Hits fresh 15-Year High: 3 Japan ETFs to Buy). 

No stock takes up more than 0.42% of the fund ensuring very low company-specific concentration risk. Expense ratio comes in at 0.40%. GWX is up 9.8% so far this year and added 6.1% in the last four weeks (as of April 10, 2015).

Vanguard FTSE All World ex-US Small-Cap ETF (VSS)

VSS – which tracks the FTSE Global Small Cap ex US Index – invests about $2.32 billion in assets in its 3,301-stock portfolio. Europe consists of over 40% of its portfolio followed by the Pacific taking over one-fourth of the total and emerging markets accounting for about one-fifth of the total. North America makes up over 10% of the basket.

VSS has minimal concentration risk as it invests as low as 3% to its top-10 holdings. It is also a low cost option charging only 19 bps in annual fees. The fund has returned about 8.1% in the year-to-date frame and gained over 5.7% in the last four weeks (as of April 10, 2015). VSS currently has a Zacks ETF Rank #3 (Hold).

Schwab International Small-Cap Equity ETF (SCHC)

This ETF targets the small cap segment of the developed market space ex U.S. This is done by tracking the performance of the FTSE Developed Small Cap ex U.S. Liquid Index. The fund is a moderately popular choice in the space having amassed about $475 million in AUM.
Holding about 1,600 stocks in its basket, SCHC is highly represented by the U.K. (19.68%) and Japan (19.24%) with Canada taking a distant third position (12.49%). With no stock accounting for more than 0.6% of the total, SCHC eliminates company-specific concentration. Expense ratio comes in cheap at 0.18%. SCZ is up 8.1 % so far this year (as of April 10, 2015). The fund returned more than 5% in the last four weeks (as of April 10, 2015).

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