At this point in 2017, one of the prominent themes regarding U.S. stocks is the laggard status of small caps. For example, the Russell 2000 Index, one of the most widely used gauges of U.S. small-cap stocks, is up a scant 1.2% year-to-date, well behind the 7.1% returned by the S&P 500.
Investors looking to allocate to small-cap stocks do not need to fret. While U.S. small caps are clearly scuffling, some exchange-traded funds (ETFs) tracking international small-cap stocks are on scintillating paces.
Some of these outperforming international small-cap ETFs are even less volatile than their U.S. peers and some offer more attractive valuations, indicating that they are some of the best ETFs to buy for investors craving small-cap exposure.
With some of these small-cap ETFs to buy, investors can get tactical by focusing on a single country, while others offer exposure to a broad set of developed markets. Some other hot ETFs holding small-cap stocks take investors to emerging markets, which has been a wise idea this year.
Consider these ETFs to buy when looking for ex-U.S. small cap exposure.
ETFs to Buy: WisdomTree Japan SmallCap Div Fd (ETF) (DJF)
Expense Ratio: 0.58%, or $58 annually per $10,000 invested
Investors looking for small caps with a little bit of yield and with the benefit of a large, developed market will want to have a look at the WisdomTree Japan SmallCap Div Fd (ETF) (NYSEARCA:DFJ).
Year-to-date, DFJ has been a vastly superior trade relative to U.S. small caps. The Japan small cap ETF is up 11.5%, a nearly 10-to-1 advantage over the Russell 2000. Plus, DFJ has been 510 basis points less volatile than the U.S. small cap benchmark.
While U.S. small caps are usually a play on the domestic economy, Japan’s small-cap stocks reflect the export-driven nature of the world’s third-largest economy. DFJ allocates a combined 60% of its weight to export-heavy industrial, consumer discretionary and technology stocks.
Another perk with DFJ is that Japanese small caps have plenty of cash.
“Japanese small-cap companies have even more cash than large caps—at 21% cash to market cap. These are the highest levels compared to all other regions. This also means that when we look at valuation levels that compare, say, total market cap to total earnings, Japanese companies have an even greater discount because they have cash levels that make them 15% to 20% cheaper than their absolute levels,” according to WisdomTree research.
ETFs to Buy: iShares MSCI EAFE Small-Cap ETF (SCZ)
Expense Ratio: 0.4%
Among international small-cap ETFs, the iShares MSCI EAFE Small-Cap ETF (NASDAQ:SCZ) is one of this year’s top asset gatherers. As its name implies, the iShares MSCI EAFE Small-Cap ETF is the small-cap ETF answer to the widely followed large cap MSCI EAFE Index.
Underscoring its status as an ETF to buy, SCZ is up 16.6% YTD. That is an advantage of nearly 200 basis points over the MSCI EAFE Index. Plus, SCZ has been significantly less volatile this year than its large-cap equivalent and the Russell 2000.
Investors probably should not pair SCZ with DFJ as the former allocates over 30% of its weight to Japanese stocks. The U.K. and Germany combine for a quarter of SCZ’s weight.
ETFs to Buy: WisdomTree Emerging Markets SmallCap Dividend Fund (DGS)
Expense Ratio: 0.63%
Explaining why the WisdomTree Emerging Markets SmallCap Dividend Fund (NYSEARCA:DGS) is a small-cap ETF to buy is actually pretty easy.
While emerging markets small-cap stocks may be thought of as a highly volatile asset class, the reality is the annualized volatility on DGS has been 220 basis points below that of the large-cap MSCI Emerging Markets Index over the past three years.
Second, the distribution yield on DGS is more than 100 basis points higher than what is found on the MSCI Emerging Markets Index. Finally, DGS has topped the emerging markets large-cap benchmark in four of the past five years.
This small-cap ETF to buy allocates about half its geographic weight to Taiwanese, Chinese and Thai small caps.
Todd Shriber does not own any of the aforementioned securities.
