In 2017, U.S. small-caps lagged domestic large-caps in significant fashion, but it was not a lost year for small-cap stocks and exchange traded funds. International small-cap ETFs, broadly speaking, delivered impressive performances.
For example, the Vanguard FTSE All-World ex-US Small-Cap ETF (NYSEArca: VSS) climbed 30.6% last year, more than doubling the returns of the Russell 2000 Index. 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.
Small-caps are also focused on the domestic economy and have less direct exposure to global geopolitical uncertainty and currency risks, as opposed to large-cap companies that have an international footprint, which may be affected by overseas risks and a strengthening U.S. dollar. Still, it pays to look outside the U.S. for other small-cap opportunities.
The $4.7 billion VSS charges just 0.13% per year, or $13 on a $10,000 investment, making it cheaper than 91% of competing funds, according to Vanguard data.
“Furthermore, it seems very likely that the fast money will start moving out of U.S. stocks and into alternatives. After all, Dow 25,000 is a great milestone but Wall Street is defined by trend-chasing — not buying and holding forever. While I fully expect America’s economy to stay strong and the U.S. stock market indexes to finish 2018 with some nice gains, it seems reasonable for investors to dabble in other places to find alpha after the great performance of the last 13 months or so,” according to InvestorPlace.
VSS holds holds nearly 3,600 stocks which trade at a price-to-earnings ratio of just under 16, implying a significant discount to major U.S. small-cap benchmarks. The median market value of the ETF’s holdings is $1.8 billion, putting the fund at the higher end of the small-cap spectrum.
“The fund is anchored in Europe, with about 38% of the portfolio’s assets located there. However, emerging markets make up a good 20% of the portfolio as well. This is enough to make this fund a good tactical bet on emerging markets growth without taking on too much risky on these volatile regions,” according to InvestorPlace.
Japan, Canada and the U.K. combine for 40.6% of the geographic exposure in VSS.