While U.S. small-cap stocks and the relevant exchange traded funds continue confounding investors this year, international small-cap ETFs are delivering stellar returns. That is true of both developed and emerging markets funds.
Investors looking for a conservative play on ex-US small-caps can consider developed market funds and the Deutsche X-trackers MSCI EAFE Small Cap Hedged Equity ETF (BATS: DBES) should be part of that conversation.
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.
In other words, DBES is a currency hedged ETF. That could imply the fund is struggling against the backdrop of a weaker dollar, but the opposite is true. In fact, DBES is up nearly 18% year-to-date. That is more than quadruple the performance offered by the widely followed Russell 2000.
DBES targets the MSCI EAFE Small-Cap U.S. Dollar Hedged Index, which focuses on smaller companies in developed markets of Europe, Australasia and the Far East. DBES is the small-cap counterpart to the popular Deutsche X-trackers MSCI EAFE Hedged Equity ETF (NYSEArca: DBEF).
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DBES, which celebrates its second anniversary in a few days, holds nearly 970 stocks. The hedged ETF would outperform similar non-hedged strategies if foreign currencies depreciate against the greenback. DBES allocates nearly 39% of its combined weight to industrial and consumer discretionary stocks. Financial services, technology and real estate names combine for nearly a third of the ETF’s roster.
Like many MSCI EAFE strategies, DBES is heavy on Japanese and British stocks as those regions combine for almost 48% of the ETF’s weight. The Japan exposure is benefiting DBEF this year as that country is home to some of the world’s best-performing small-caps.
DBES charges 0.45% per year, or $45 on a $10,000 investment.
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