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3 ETF Options for International Small-Cap Exposure

Patricia Oey

Patricia Oey: I recently wrote an article on international small-cap ETFs that highlighted the Vanguard FTSE All-World ex-US Small-Cap ETF (VSS). This fund gives you a very diversified portfolio with exposure to both developed- and emerging-markets small caps for only 19 basis points. As emerging markets have underperformed over the last few years, so has this ETF, as most international small-cap funds have little or no allocation to emerging markets.

A number of readers wanted to know more about the WisdomTree International SmallCap Dividend ETF (DLS). Like most WisdomTree funds, this is a dividend-focused ETF, which weights its constituents by annual dividends paid. Interestingly, although this fund has a value tilt, it has been slightly less volatile than a market-cap-weighted benchmark. Another thing to note is this fund's large 16% weight in Australia. Australian companies tend to pay out relatively high dividends, and this is partly due to the fact that Australian dividends are not taxed twice, as they are here in the U.S. While Australian stocks have been performing well, the Aussie dollar has declined sharply against the U.S. dollar over the last six months. So, this overweight in Australia has hurt this fund's returns.

Those who expect the U.S. dollar to continue rising may want to consider a currency-hedged ETF. There is currently only one [among international small-cap ETFs]--the WisdomTree Europe Hedged SmallCap fund (EUSC), which only launched about a month ago. This fund holds companies domiciled in the eurozone and hedges out the impact of a rising or declining euro vs. the U.S. dollar. The fund weights its holdings by annual dividends paid, and its largest country allocations are Italy, France, and Germany--which each account for about 20% of the portfolio. Investors should take note that this is not the hedged version of the WisdomTree Europe SmallCap Dividend ETF (DFE), which includes non-eurozone countries such as the U.K. and Switzerland.

The main difference between the dozen or so international small-cap ETFs is their country allocations. Investors should check an ETF's portfolio to ensure that it is providing a well-diversified exposure.