Small-cap stocks are often thought to be a volatile asset class with investors believing that is particularly true of international small-caps. However, international small-caps are easily outperforming their U.S. counterparts this year, indicating investors may want to consider the risk/reward paradigm offered by ex-US smaller stocks.
The Deutsche X-trackers MSCI EAFE Small Cap Hedged Equity ETF (BATS: DBES) is an exchange traded fund to consider. DBES “seeks investment results that correspond generally to the performance, before fees and expenses, of the MSCI EAFE Small Cap U.S. Dollar Hedged Index. DBES offers investors purer access to small-cap developed market equities while mitigating exposure to fluctuations between the value of the U.S. dollar and select foreign currencies,” according to Deutsche Asset Management.
DBES is up 20% year-to-date, or more than triple the returns posted by the US-focused Russell 2000 Index. Making the year-to-date performance of DBES all the more impressive is that the ETF is a currency hedged product, meaning it could be vulnerable to the weaker dollar, but that clearly has not been the case in 2017.
“Small companies tend to lack the global scale of their large-cap counterparts, with a large portion of their revenue coming from their local economy,” said Morningstar. “This is true both in the U.S. and abroad, and makes these firms more susceptible to local economic conditions and policies. They are less likely to have competitive advantages than larger companies. In general, small-caps should be more volatile than large-caps, and may provide a higher rate of return as compensation.”