International small cap

Introduction
Since domestic large-cap stocks and international large-cap stocks have high correlation, some investors look for international small-cap mutual funds and ETFs to further diversify their portfolios. This page is intended to present a summary of international small-cap mutual funds and ETFs.

Selection
[1,3] According to Morningstar, except for the EWX market cap, which is from its own website.

[2] Three-month average volume according to [http://finance.yahoo.com/ Yahoo! Finance]. As of 07/04/2008.

[4] According to Bloomberg. As of 03/31/2008 for the ETFs and 04/30/2008 for VINEX.

[5] Vanguard International Explorer Fund is closed to new investors, but the fund may be available in 401(k) and 403(b) plans directly administered by Vanguard. While all the other tabulated products are ETFs, VINEX is an actively managed open-end fund.

Tax Efficiency
Vanguard International Explorer Fund has been very tax inefficient at least for the past 10 years. You should strongly consider holding it in a tax-advantaged account.

Now, the ETFs above have not been around for a long time. As such, there is little information on their tax efficiency, and what there is may not be reliable in the long run. However, the WisdomTree ETFs, because they choose stocks which pay high dividends, are likely to be tax-inefficient even if they do not realize gains, and GWX had an 0.87% tax cost in its first year because it distributed a large capital gain.

Volume
Many of the ETFs above are thinly traded. You should expect larger-than-average bid-ask spreads.

Underlying Securities
The products above have quite different sets and weights of underlying securities. One product might include stocks from one country, whereas another product might completely lack them. You are strongly advised to read the prospectus of each product and, if necessary, do additional research before investing in any of the products above.

Resources

 * Altruist FA: Foreign Developed Markets Small Cap Funds
 * Altruist FA: Emerging Markets Small Cap Funds

Academic Papers

 * Huang, Wei, Eun, Cheol S. and Lai, Sandy, "International Diversification with Large- and Small-Cap Stocks" . Journal of Financial and Quantitative Analysis (JFQA), Forthcoming Available at SSRN: http://ssrn.com/abstract=932961
 * Huang, Wei, "Financial Integration and the Price of World Covariance Risk: Large vs. Small-Cap Stocks " . Journal of International Money and Finance, Forthcoming Available at SSRN: http://ssrn.com/abstract=898067
 * Nicodano, Giovanna and Guidolin, Massimo, "Small Caps in International Equity Portfolios: The Effects of Variance Risk" (December 2005). AFA 2006 Boston Meetings Paper Available at SSRN: http://ssrn.com/abstract=686142
 * Petrella, Giovanni, "Are Euro Area Small Cap Stocks an Asset Class? Evidence from Mean-Variance Spanning Tests" . European Financial Management, Vol. 11, No. 2, pp. 229-253, March 2005 Available at SSRN: http://ssrn.com/abstract=688650