Investors may consider small-cap Europe exchange traded fund for their cheaper valuations and potential growth opportunity in a seasonally strong period.
Lamar Villere, co-manager of the Villere Balanced Fund, argues that small-caps are where investors should be now, reports Reem Nasr for CNBC.
We are heading toward a seasonally strong period for the small-cap asset category as smaller stocks typically outperform larger and more sluggish peers. [ETFs History Says A Strong October Bodes Well For]
“For one thing we think that’s where you can actually find some growth and find some companies that aren’t as well followed, so you can get in at attractive valuations,” Villere told CNBC, contending that small-caps are more able to defend against outside pressures, such as slowing global growth.
ETF investors can also track the broad group through options like the iShares Core S&P Small-Cap ETF (NYSEArca: IJR), which tracks the S&P SmallCap 600; Vanguard Small Cap ETF (NYSEArca: VB), which follows the CRSP US Small Cap Index,; the iShares Russell 2000 ETF (NYSEArca: IWM), which tracks the Russell 2000 Index; and Schwab U.S. Small-Cap ETF (NYSEArca: SCHA), which tracks the Dow Jones U.S. Small-Cap Total Stock Market Index.
Additionally, since small-caps have fallen behind this year, Villere believes smaller stocks offer more attractive valuations relative to large-caps.
However, Wasif Latif, USAA Investments head of global multi-assets, argues that U.S. stocks may be overvalued in general after a multi-year run, so investors should diversify with overseas assets.
“When you look across the spectrum, U.S. equities are generally overvalued. European equities are undervalued on a relative basis, so we like Europe more than the U.S.,” Latiff told CNBC.
Consequently, investors who would like to combine the small-cap and Europe equity themes may look to relevant ETFs, including the WisdomTree Europe SmallCap Dividend Fund (NYSEArca: DFE), iShares MSCI Europe Small-Cap ETF (NasdaqGM: IEUS) and SPDR EURO STOXX Small Cap ETF (NYSEArca: SMEZ). DFE has a 14.9 price-to-earnings ratio, IEUS has a 17.3 P/E and SMEZ shows a 15.9 P/E. In contrast, the S&P 500 Index is trading at a 18.5 P/E.
Moreover, if you are concerned about a weakening euro currency, there are currency-hedged small-cap Europe ETF options available, including the WisdomTree Europe Hedged SmallCap Equity Fund (NYSEArca: EUSC) and iShares Currency Hedged MSCI Europe Small-Cap ETF (BATS: HEUS). Both EUSC and HEUS try to diminish the negative effects of a depreciating euro currency on returns. However, the two funds may underperform non-hedged ETFs if the euro strengthens.
For more information on small-capitalization stocks, visit our small-cap category.
Max Chen contributed to this article.