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Consider Going Abroad for Small-Value Exposure

Foreign small-value stocks are generally cheaper with less debt.

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U.S. small-value stocks have made a nice run of late. Over the past six months, the Russell 2000 Value Index gained 44.2% through Jan. 21 versus 19.3% for the S&P 500. But small-value stocks still have a lot of ground to make up after being the worst-performing segment of the U.S. equity market over the trailing 10 and 15 years. This still makes the group a potential target for contrarian investors.

But there are good reasons why small-value stocks lagged over those periods. It is arguably the most economically sensitive part of the market, with nearly 55% of the Russell 2000 Value Index in cyclical stocks versus 31% for the S&P 500. So, these companies have borne the brunt of recent economic volatility.

Kevin McDevitt does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.