Small cap investors already know that looking at equities outside the large cap universe can yield substantial gains, but one area they may not have considered is looking abroad—as such, investors should also consider international small cap exposure.
“Many asset allocators will be surprised to learn that the total market value of the companies in the MSCI ACWI ex USA Small Cap Index, our proxy for international small-caps, is twice as large as that market capitalization of the Russell 2000 Index,” a GuruFocus.com article noted in Yahoo Finance.
“By market value alone, international small-caps would seem to merit consideration for inclusion in a globally diversified portfolio,” the article added. “However, their performance record makes an even stronger case for its inclusion as part of an overall equity allocation. (All of the results that follow begin with the first full month of performance for the MSCI ACWI ex USA Index on 5/31/94).”
One ETF to consider for getting international diversification via small cap equties is the SPDR S&P International Small Cap ETF (NYSEArca: GWX). The fund seeks investment results that correspond generally to the total return performance of the S&P Developed Ex-U.S. under USD2 Billion Index, which is a market capitalization weighted index designed to define and measure the investable universe of publicly traded small-cap companies, as defined by the index, domiciled in developed countries outside the United States.
Relative Plays in Small Caps
If investors believe that small cap equities will outperform large cap equities, the Direxion Russell Small Over Large Cap ETF (NYSEArca: RWSL) provides a means to not only see small cap stocks perform well, but a way to capitalize on their outperformance versus their large cap brethren. RWSL seeks investment results, before fees and expenses, that track the Russell 2000®/Russell 1000® 150/50 Net Spread Index.
The index measures the performance of a portfolio that has 150% long exposure to the Russell 2000® Index (the “Long Component”) and 50% short exposure to the Russell 1000® Index (the “Short Component”). On a monthly basis, the Index will rebalance such that the weight of the Long Component is equal to 150% and the weight of the Short Component is equal to 50% of the Index value. In tracking the Index, the Fund seeks to provide a vehicle for investors looking to efficiently express a small-capitalization over large-capitalization investment view by overweighting exposure to the Long Component and shorting exposure to the Short Component.
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