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Embracing International Small-Cap ETFs

Small-caps have bounced back in style this year. As of April 29, the Russell 2000, the benchmark small-cap index, was up 3.9% year-to-date compared to a 3.5% for the large-cap Russell 1000.

Bullishness for small-caps has not been confined to U.S. borders, indicating that investors should consider international small-cap exchange traded funds, some of which have delivered impressive returns this year. Still, international small-caps come with unique risks that have kept many investors at bay.

“The lack of information, coupled with liquidity concerns about companies in developing countries, has meant most American investors historically have stayed away from this corner of the market. In fact, not only do most U.S. investors avoid foreign small-caps, many don’t have any international exposure at all, which many financial professionals say is a mistake,” reports Alex Davidson for the Wall Street Journal.

That is not to say all U.S.-listed small-cap ETFs are small. They are not. For example, the iShares MSCI EAFE Small-Cap ETF (SCZ) , the small-cap answer to the widely followed MSCI EAFE Index is home to over $4.4 billion in assets, nearly $444 million of which come into the fund this year.

SCZ, which allocates over half its combined weight to Japanese and British stocks, has surged 11% this year. The ETF’s three-year standard deviation of 12.98% is actually slightly lower than the comparable metric on the EAFE Index. [Easy Could Power International Small-Cap ETFs]

Income investors can also turn to international small-cap ETFs in order to boost their portfolios’ yield. The $1.4 billion SPDR S&P International Dividend ETF (DWX) has a trailing 12-month yield of 5.17%.

DWX, which turned seven earlier this year, holds developed and emerging markets stocks, but the bulk of the ETF’s weight is allocated to developed market fare. Canada, the U.K. and Australia, three of the best ex-U.S. dividend growth markets, combine for over half of DWX’s weight. DWX is up 10.6% this year. [Big Yields With International Dividend ETFs]

“Many experts agree that while index funds are a good low-cost choice for most individual investors, international stocks are one area where active management has a greater chance of paying off,” according to the Journal.

That does not diminish the success and asset-gathering prowess of ETFs like SCZ, DWX and the $1.4 billion WisdomTree Emerging Markets SmallCap Dividend Fund (DGS) .

DGS, which turns eight later this year, is one of the largest dedicated emerging markets small-cap ETFs. The fund tries to mitigate some of the volatility expected with emerging markets small-caps by allocating about half its weight to Taiwan, China and South Korea. Taiwan and South Korea are two of the least volatile emerging markets.

DGS is up 8.6% this year and has an index dividend yield of 3.93%.

SPDR S&P International Dividend ETF