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Easy Money Could Fuel Overseas Small-Cap ETFs


The flow of easy money has fueled the U.S. equities market, and with global central banks turning on their money printing presses, the global push toward riskier assets may help lift broad international small-cap exchange traded funds.

Frank Gannon, co-chief investment officer for Royce, argues that the Federal Reserve’s near-zero interest rates for the past six years has had the unintended consequence of lifting company stocks with heavy debt and little or no earnings, reports Charles stein for Bloomberg.

Consequently, stocks have more-or-less moved in lockstep since the 2008 financial crisis. Monthly dispersion among S&P 500 index members, a measure of how correlated individual stocks are to the broader market, narrowed for a fifth year in 2014 and touched its lowest level since 1979 back in August.

“There has certainly been little reward for owning high-return, superior business models that are conservatively financed,” Neuberger Berman’s small-cap stock team said in a research note.

As global central banks begin firing up their own loose monetary policies, we could see a similar broad, lockstep move in small-cap stocks of overseas markets.

For instance, the European Central Bank has already enacted negative interest rates and plans a 1 trillion euro bond-purchasing program to stimulate the economy. By turning on the money spigot in Europe, small-cap Europe ETFs could capitalize on the potential rush toward riskier assets, including the WisdomTree Europe SmallCap Dividend Fund (DFE) and SPDR EURO STOXX Small Cap ETF (SMEZ) . [Small-Cap Europe ETFs: Domestic Consumption to Improve on Weak Euro]

DFE tracks European small-cap stocks weighted by cash dividend paid and comes with a 2.94% 12-month yield. Due to its weighting methodology, the ETF may have a greater value tilt. The fund shows a 14.45 price-to-earnings ratios.

SMEZ tracks small-cap Eurozone stocks taken from the STOXX Europe Small 200 Index.

Alternatively, for broader international developed market exposure, the iShares MSCI EAFE Small-Cap ETF (SCZ) tracks small-cap stocks taken from the Europe, Australasia and the Far East, or EAFE. SCZ includes a 53.8% tilt toward Europe, 25.3% Japan and 6.7% Australasia. [Japan ETFs: Rising Suns, Attractive Valuations]

The Bank of Japan has been implementing its own loose monetary policies ever since Shinzo Abe took power in late 2012. Australia’s central also recently cut its benchmark rates to a record low earlier in February. [It Could be a Big Day for Australia ETFs]

However, the only drawback is that these small-cap ETFs do not hedge currency risks, so any further depreciation in the foreign currency could weigh on overall returns.

For more information on the international markets, visit our global ETFs category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.