Considering an International Small-Cap ETF

U.S. small-caps have rebounded in style this year as highlighted by gains of better than 3% for the iShares Core S&P Small-Cap ETF (NYSEArca: IJR) and the iShares Russell 2000 ETF (NYSEArca: IWM).

However, investors should not ignore the potential of international small-caps, either. That asset class can be accessed with a number of exchange traded funds, including the cost-efficient Vanguard FTSE All World ex-US Small-Cap ETF (NYSEArca: VSS). VSS, which saw its expense ratio pared last year, charges just 0.19% year, or less than 88% of rival funds. [Vanguard Pares Fees on Some ETFs]

VSS has easily outpaced its U.S.-focused rivals in 2015 with a gain of 4.5%. However, small-cap shares are known for the higher level of volatility and risk. Small-cap companies are qualified as those that have a market cap between $300 million and $2 billion. The benefit of an ETF such as VSS is portfolio diversification, particularly for investors that already own large-cap international ETFs that are heavy on familiar, multi-national names.

“International small caps, on the other hand, tend to generate a greater share of revenue in their respective domestic markets. As a result, a portfolio of international small caps has historically offered more diversification benefits, relative to a portfolio of international large caps, for a U.S.-based investor,” according to a recent Morningstar research note.

VSS makes good on the promise of diversification. The $2.7 billion ETF holds just over 3,300 stocks an its top 10 holdings combine for just 3% of the fund’s weight. VSS’ portfolio is somewhat Europe heavy with 41.6% of its geographic weight going to European nations. Adding to developed markets heft is a 26.4% weight to developed Asia-Pacific markets.

VSS does mix in a nearly 19% weight to emerging markets small-caps, but the U.K., Japan and Canada combine for 44% of the ETF’s weight.