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A Bold Play on Improving Fiscal Conditions

This article was originally published on ETFTrends.com.

While global monetary policies are becoming tighter, fiscal conditions in some important ex-US markets are improving. That could provide some upside for downtrodden international equities and exchange traded funds, including small caps, in 2019.

The SPDR S&P International Small-Cap Fund (GWX) is one way of accessing ex-US small-cap stocks. Home to nearly $770 million in assets under management, GWX follows the S&P Developed Ex-U.S. Under USD2 Billion Index. The ETF provides exposure to over 25 countries, the bulk of which are developed markets.

“Fiscal policy also reaches outside the populist realm. China is discussing income tax cuts in the range of 1% of GDP,” said State Street in a recent note. “Canada’s Prime Minister Justin Trudeau recently unveiled corporate tax breaks worth C$14 billion over six years. And French President Emmanuel Macron is trying to push forward tax cuts for the middle class.”

Canadian and French stocks combine for just over 10% of GWX's weight.

Looking Ahead

While Europe-related exchange traded funds are struggling this year, compelling valuations throughout the region and robust dividend profiles could make ETFs like GWX credible options for investors seeking some international portfolio diversification in 2019. Five of GWX's top 10 geographic exposures are European economies.

“While fiscal policy can shift domestic consumption and wealth, it can also generate volatility through supply chain risks or new costs. This poses particular risks to large multinational firms with significant sales coming from outside their borders,” said State Street.

Like U.S. small-cap ETFs, GWX offers a domestic focus relevant to the fund's member countries. That positions the fund to benefit from increasing consumer sentiment and improving fiscal conditions.

“However, smaller firms with a greater percentage of domestic sales may stand to benefit, both from an uptick in local demand for their products and services and from new policies that could reduce costs,” notes State Street. “Small-cap companies are also much less likely to be caught in the crossfire of protectionism, as their average foreign sales exposure is less than that of large caps.”

GWX allocates over 35% of its combined weight to industrial and consumer discretionary stocks.

For more information on European markets, visit our Europe category.

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