Despite the fast recovery in small-caps and related exchange traded funds (ETFs), one fund manager believes there is still enough room for a further upswing in the international arena.

According to Edwin Lugo, manager of Franklin International Small Cap Growth Fund, the rally in the international small-cap stocks is not over. While stock-picking challenges will intensify, he says, money can still be made in select markets, writes Jeff Benjamin for InvestmentNews. (Is the timing right for small-cap ETFs?)

Lugo thinks that “we’re at the middle point of what we would consider fully valued for international small-caps, and we’re still seeing opportunities.” He has been increasing his fund’s exposure to Germany, Switzerland, Ireland and Japan. He has also been reducing exposure to retail stocks and adding industrial and financial sector stocks.

Lugo also prefers to stay within developed markets because of their higher transparency and security.

With ETFs, you don’t have to be limited by stock-picking. There are a variety of international small-cap funds available, and the research on the holdings has been done for you. And don’t forgot: in a recovery, small-caps have a historical tendency to outperform because they’re better able to adapt to shifting market conditions. Let the trend lines tell you the true direction, though. (How to follow trends).

For more information on small-caps, visit our small-caps category.

• International Small Cap Dividend Fund (NYSEArca: DLS): up 37.2% year-to-date
• iShares MSCI EAFE Small-Cap Index Fund (NYSEArca: SCZ): up 41.5% year-to-date
• SPDR S&P International Small-Cap Fund (NYSEArca: GWX): up 37.2% year-to-date
• FTSE Developed Ex-US Small Cap ETF (NasdaqGS: IFSM): up 41.0% year-to-date
• Vanguard FTSE All-World ex-U.S. Small Cap ETF (NYSEArca: VSS): up 3.4% in the last three months
• SPDR S&P Emerging Markets Small Cap (NYSEArca: EWX): up 89.6% year-to-date

Max Chen contributed to this article.

Tags: Asset Class ETFs, DLS, Emerging Markets, EWX, Global ETFs, GWX, IFSM, SCZ, Small-Cap, VSS