Small-cap stocks both domestic and international are establishing leadership roles. Advisors can turn to model portfolios to avoid mere stock-picking in this category.

A solid starting point is the WisdomTree Core Equity Model Portfolio, which features exposure to several small-cap exchange traded funds spanning U.S. and international equities.

“This model portfolio is designed for growth-oriented investors with a long-term horizon looking to maximize long-term potential for capital growth through a globally diversified set of equity ETFs,” according to WisdomTree.

With the U.S. economy emerging from the coronavirus recession, the aforementioned model portfolio is a vital near-term consideration.

“We see this seemingly happening again as we slowly pull ourselves out of the pandemic-induced recession of the first two quarters of 2020,” said Scott Welch, WisdomTree model portfolios chief investment officer, in a recent note.

A 2-for-1: Developed and Emerging Markets Small-Caps

Enhancing the allure of the WisdomTree model portfolio is its exposure to both developed and emerging markets small-caps.

Mega-cap stocks have dominated in this year’s rally, but exchange traded fund investors should not forget the role of small-capitalization stocks, especially in the nascent recovery phase of the traditional economic cycle.

Small-cap companies could be well-positioned to benefit from a COVID-19 economic recovery. During downturns, small stocks typically underperform, partially because small stocks often have fewer buffers to survive economic shocks. However, smaller companies have rewarded investors for their higher risk over full market cycles. Furthermore, the size factor may be a particularly useful investment in the current economic climate since it has typically outperformed during the recovery period of an economic cycle relative to other factors.

“Not only have developed international small caps outperformed on an absolute return basis over a 15-year common investment period (a function, we believe, of it being a less efficient asset class and, therefore, offering a better opportunity to generate “alpha”), but they dramatically outperformed as we exited the 2000–2002, the 2008–2009 and the 2020 U.S. recessions,” notes Welch.

There are reasons to like the model portfolio’s emerging markets exposure, too.

“There is less correlation between performance and economic recovery in the U.S. because EM small-cap stocks generally are more dependent on economic conditions in their home countries—one of the reasons we like them as diversifiers in a global portfolio,” states Welch.

For more on how to implement model portfolios, visit our Model Portfolio Channel.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.