As International Equities Surge, Get Small-Cap Exposure

International equities are running alongside the bull run in the major market indexes in the U.S. in the rally. It’s an opportune time to position a portfolio for more upside gain in international small-caps.

The big tech rally is supercharging the domestic rally in the U.S., but as mentioned, international equities are right there with it.

“The rally this year in U.S. stocks has been centered on megacap tech stocks, but international equities have enjoyed a boom as well that is more broad based,” a MarketWatch article noted, also mentioning that a chart from Bank of America that showed that the MSCI all-country world index ex-U.S. vs. global bonds just broke out of a 15-year trading range.

Additionally, as Morningstar noted, international equities also add an extra dose of diversification to a portfolio.

“In our recently published 2023 Diversification Landscape report, we examined the case for international diversification, assessing short- and long-term trends in correlations, returns, and risk,” Morningstar said. “While the correlation between non-U.S. and U.S. stocks has increased over the past several decades, non-U.S. stocks held up slightly better than those in the U.S. in 2022.”

“Moreover, non-U.S. stocks have made a strong case for themselves in certain environments, such as when the dollar has declined relative to other major foreign currencies,” Morningstar added. “As the U.S. market has grown increasingly top-heavy with large technology stocks, non-U.S. indexes’ higher exposure to value sectors should help diversify that bias.”

Get Value Exposure in a Small-Cap International Rally

Small-cap exposure can help amplify moves to the upside if the momentum in a rally sustains itself. Investors who may be after small-cap exposure but want to mitigate risk due to the potential of a recession should perhaps consider an active management strategy that focuses on value.

Additionally, for investors who want extra diversification in their portfolios via international equities with the growth potential of small-caps, there’s one exchange traded fund (ETF) worth considering. The Avantis International Small Cap Value ETF (AVDV) invests in a broad group of non-U.S. small-cap value companies believed to have higher expected returns across developed market countries, sectors, and industries.

Highlights of AVDV:

  • Invests in a broad set of non-U.S. developed small-cap companies and is designed to increase expected returns by focusing on firms believed to be trading at low valuations with higher profitability ratios.
  • Pursues the benefits associated with indexing (diversification, low turnover, transparency of exposures), but with the ability to add value by making investment decisions using information in current prices.
  • Efficient portfolio management and trading process intended to enhance returns while seeking to reduce unnecessary risks and costs for investors.
  • Built to fit seamlessly into an investor’s asset allocation.

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