International small cap

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Since US 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

Since new ETFs open regularly this list is not complete. It includes the major ETFs, but excludes some which are very expensive, very small and thus expensive to trade, or very new.

Ticker
Symbol
Name Markets Weighting Expense
Ratio
[1]
Share
Volume [2]
Dollar
Volume [3]
Average
Mkt Cap [4]
Total
Assets [5]
VFSVX Vanguard FTSE All-World ex-US Small-Cap Index Fund All Market cap 0.31% N/A N/A $1,374M $2.72B
VSS Vanguard FTSE All-World ex-US Small-Cap Index Fund ETF All Market cap 0.17% 130,189 $12.2M $1,374M $2.72B
VINEX Vanguard International Explorer Fund All Active 0.42% N/A N/A $1,760M $2.7B
GWX SPDR S&P International Small Cap Developed Market cap 0.40% 134,671 $3.91M $898M $686M
SCZ iShares MSCI EAFE Small Cap Index Developed Market cap 0.40% 774,112 $38.6M $1,717M $6.30B
SCHC Schwab International Small Cap Developed Market cap 0.16% 161,110 $4.69MM $1,528M $897M
DLS WisdomTree International SmallCap Dividend Developed Dividend 0.58% 60,584 $4.96M $1,123M $1.16B
FNDC Schwab Fundamental International Small Company Index Developed Fundamental 0.46% 110,878 $3.15M $2,102M $682M
PDN PowerShares FTSE RAFI Developed Markets exUS S/M Developed Fundamental 0.50% 20,046 $0.541M $1,929M $162M
EWX SPDR S&P Emerging Markets Small Cap Emerging Market cap 0.65% 125,410 $4.98M $846M $341M
EEMS iShares MSCI Emerging Markets Small Cap Emerging Market cap 0.71% 48,590 $1.96M $882M $160M
DGS WisdomTree Emerging Markets Small Cap Dividend Emerging Dividend 0.63% 13.794 $5.23M $1,200M $956M

Caution

Tracking error

Since these ETFs trade in illiquid stocks, many of them only sample the indexes they track, and they incur transaction costs when the indexes change. Therefore, the ETFs do not necessarily track the index well; deviations of 1% annually are common. EWX underperformed its index by about 3% annually through 2012, but was close in 2013-2015 and outperformed the index in 2016. (This tracking error is based on the net asset value; when you buy or sell an ETF, this may add to the tracking error because these ETFs frequently trade at a premium or discount to net asset value.)

Tax efficiency

Vanguard International Explorer Fund has been very tax inefficient at least for the past 10 years, and since it is actively managed, it is likely to remain tax-inefficient, You should strongly consider holding it in a tax-advantaged account.

Small-cap international ETFs tend to distribute more capital gains than other ETFs, possibly because there is less creation/redemption activity. Some foreign countries, particularly emerging markets, do not allow in-kind redemptions, eliminating the tax benefit from the redemption process. [6] Small-cap ETFs should be less likely to distribute gains after several years of operation, because the redemption process is more effective at reducing gains when shares have been purchased at a wide range of prices. As of 2016, only the SPDR ETFs GWX and EWX have distributed gains after the second year.

GWX has has the largest distributions; it distributed a 1.5% short-term gain in its first year (2007), an 0.8% long-term gain in 2011, a 2.7% short-term and 7.5% long-term gain in 2014, an 0.5% short-term and trivial long-term gain in 2015, and an 0.8% shor-term and 0.5% long-term gain in 2016. EWX distributed a 1.5% short-term gain in its second year (2009), a 2.1% short-term and 0.5% long-term gain in 2010, and a 1.3% short-term and 2.2% long-term gain in 2011. VSS distributed a 0.7% short-term gain in its first year (2009) and 0.4% short-term and 0.4% long-term in its second year (2010). DLS distributed an 0.8% short-term gain in its second year (2007).

Independent of capital gains, DLS and DGS are likely to have higher tax costs than the other ETFs, because their indexes overweight stocks with a higher dividend yield.

Trading costs

Many of the ETFs above are thinly traded, and even those which have fairly high volume have larger-than-average bid/ask spread because the value of the underlying stocks is more difficult to estimate. The average spread on the higher-volume ETFs is now relatively low; it is down to 0.03% on SCZ and 0.08% on VSS. In contrast, the lower-volume PDN and EEMS have spreads of 0.32% and 0.56%. [7]

Underlying securities

The products above have quite different sets and weights of underlying securities. Because of different definitions of developed and emerging markets, two indexes in the same market segment may have different country holdings. Even within the same countries, market-cap-weighted indexes have different country weights because of different definitions of small-cap by country. 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.

International developed markets small cap index returns


(View Google Spreadsheet in browser, then File --> Download as to download the file.)

Indexes: Dow Jones Developed Markets Small Cap Total Stock Market Index; FTSE Developed Small Cap ex-North America Index; MSCI EAFE Small Cap Index; Russell Developed ex-U.S. Small Cap Index; S&P Developed Ex-U.S Small Cap Index

See also

References

  1. According to Vanguard for Vanguard funds, Morningstar for others Last updated 12/31/2016.
  2. Three-month average volume according to Yahoo! Finance. As of 12/31/2016.
  3. Share volume multiplied by 12/31/2016 closing price.
  4. According to Morningstar.
  5. According to Morningstar as of 12/31/2016; VFSVX/VSS assets include both share classes and use Vanguard data.
  6. Fidelity, ETFs versus Mutual Funds, Tax Efficiency
  7. According to ETF.com, as of 12/31/16]

External links

Resources

Bibliography