Investors seeking to diversify their international portfolios should also consider small-cap exchange traded fund options.
For instance, the Vanguard FTSE All World ex-US Small-Cap ETF (NYSEArca: VSS) tracks the FTSE Global Small-Cap ex-US Index, which provides exposure to 3,241 small-cap global companies taken from 43 countries.
“The main reason to own international small caps is diversification,” according to Patricia Oey for Morningstar.
Since many large-cap international companies would compete with U.S. multinationals, investors may gain a more focused exposure to global markets through international small-caps that generate a grater share of revenue in their respective 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,” Oey added.
Looking at international small-caps’ risk profile, smaller companies are not much more volatile than their larger counterparts. For instance, the standard deviation for the FTSE Global Small Cap ex-US Index was 17.6% over the trailing five years, whereas the FTSE All World ex US Index showed a standard deviation of 16.6%.
However, potential investors should be aware that VSS does not hedge currency risks. Consequently, if foreign currencies continue to depreciate against the U.S. dollar, the international ETF’s USD-denominated returns may be lower.