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Looking at International Small-Cap ETFs

This article was originally published on ETFTrends.com.

With domestic small-cap stocks and the related exchange traded funds flourishing, some investors may feel compelled to examine international equivalents. Well-known international small-cap ETFs include the iShares MSCI EAFE Small-Cap ETF (SCZ) .

SCZ rivals include the Vanguard FTSE All-World ex-US Small-Cap ETF (VSS) and the Schwab International Small-Cap Equity ETF (SCHC) .

Earlier this year, Morningstar lowered its rating on SCZ to Neutral from Bronze while lowering VSS to Bronze from Silver. The research firm upped its rating on Schwab's SCHC to Bronze from Neutral. VSS follows the FTSE Global Small Cap ex US Index and provides an easy way to gain broad exposure across developed and emerging market companies outside of the U.S.

SCHC also tracks the FTSE Developed Small Cap ex US Liquid Index while SCZ, the iShares ETF, follows the small-cap answer to the large-cap MSCI EAFE Index.

“These three funds also all have Positive Parent Pillar ratings. The Parent Pillar rating assesses the larger organization behind a fund, ensuring that fund sponsors are good stewards of investors' money. It is important to hold funds from responsible organizations, but the Parent Pillar rating has a smaller impact on the Analyst Rating because the characteristics of the fund itself have a greater impact on future performance,” said Morningstar in recent note.

Looking To Rebound

Domestic small-cap stocks are surging this year. For example, the benchmark Russell 2000 Index is up nearly 14% year-to-date. However, international small-cap equities are lagging as highlighted by the fact that each of SCHC, SCZ and VSS are lower year-to-date. VSS is the worst-performing member of the trio with a 2018 loss of 3.1%.

“With respect to performance, SCZ’s historic risk-adjusted return was among the best in the foreign small/mid-blend category, making it worthy of a Positive Performance Pillar rating,” said Morningstar. “By comparison, SCHC and VSS had more exposure to firms from the materials and energy sectors than SCZ. Consequently, their category-relative performance suffered more when commodity and oil prices declined in 2012 and 2015, respectively.”

Related: How to Pick & Choose Your Emerging Market ETF Opportunities

Over the past three years, SCZ is the best-performing member of the international small-cap ETF trio mentioned here. The iShares fund is up 38% over that period compared to an average gain of about 32.6% for SCHC and VSS.

“All three funds are cheap compared with the category average, which stood at about 1.33% as of July 31, 2018. SCHC is the cheapest in the category while VSS is only 2 basis points behind, so both have a Positive Price Pillar rating. SCZ is cheap compared with the category average and also rates Positive, but it isn’t competitive with the other two,” according to Morningstar.

For more information on small-capitalization stocks, visit our small-cap category.

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