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Global Economy on the Mend: 4 Small-Cap ETF Plays

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International investing has been extremely upbeat since the beginning of this year on the improving health of several economies. Policy easing has played a major role in driving global economic growth.

Investors should note that the Euro zone silently surpassed the U.S. economy on the growth front in 2016. Last year, Euro zone’s GDP growth outdid the U.S. by 1.7% to 1.6%. The Japanese economy grew 0.3% sequentially in Q4 of 2016, maintaining the same clip of the prior period. Plus, it was the fourth successive quarter of growth.

Emerging markets, as a whole, are also better placed now. Most developed economies – which were facing deflationary threats so long – are slowly returning to the inflationary track. Japan and the Euro zone are still pursuing an ultra-easy monetary policy along with quantitative easing. All these point to better demand from foreign economies.

How to Play The Recovery?

Small caps are considered as the measure of domestic well-being. In a growing economy, these pint-sized securities perform the best as these generate most of their revenues from the domestic market. These are less ruffled by global economic concerns (read: 4 Beaten Down Small Cap ETFs to Buy Now).

A wave of cheap money in those international nations will lead to stepped-up economic activities, and rising business and consumer confidence which in turn will benefit small-cap companies.

Considering the fact that this investing spectrum is thinly traded, the illiquid nature works benignly for the small cap stocks. Rising revenues and earnings not only fuel investor demand, given the limited number of shares of a small cap, these also give a boost to the share price.

Below are our four selections that should perform favorably in this kind of a global macroeconomic backdrop and could thus be in watch. Investors should note that the following are among the top performers in the foreign small-cap equities ETF space so far this year. Not only this, these funds breezed past the small-cap U.S. Equity ETF iShares Russell 2000 (IWM - Free Report) (read: Face Off: Small Versus Large Cap ETFs).

International Small-Cap ETFs in Focus

iShares Edge MSCI Multifactor Intl Small-Cap ETF (ISCF - Free Report)

The fund isdesigned to select equity securities from MSCI World ex USA Small Cap Index, giving high exposure to four investment style factors: value, quality, momentum and low size. The fund charges 40 bps in fees and yields about 2.61% annually. No stock accounts for more than 1.19% of the portfolio. Japan (28.2%) and U.K. (20.8%) are the top two economies of the fund (read: BlackRock Slashes Fees, ETF Price War Intensifies).

WisdomTree International SmallCap Dividend ETF (DLS - Free Report)

The fund looks to gain exposure to the developed international world, ex-U.S. and Canada small cap equity from the dividend-paying companies. Japan, U.K. and Australia have a double-digit weight each in the fund. The fund charges 58 bps in fees and yields about 3% annually.

Vanguard FTSE All World ex-US Small-Cap ETF (VSS - Free Report)

VSS – which tracks the FTSE Global Small Cap ex US Index – invests about $3.8 billion in assets in its 3,446-stock portfolio. Japan, Canada and the U.K. have a double-digit weight in the fund. It is also a low cost option charging only 13 bps in annual fees.

iShares MSCI EAFE Small-Cap ETF (SCZ - Free Report)

This ETF targets the small cap segment of the developed market space. This is the most popular fund in the space, having amassed $7.2 billion in AUM.
 
Holding about 1,619 stocks in its basket, SCZ is highly represented by Japan (31.3%) and the U.K. (17.2%) with Australia taking a distant third position (6.5%). Putting just 2.85% assets in the top 10 holdings, SCZ eliminates company-specific concentration. Expense ratio comes in at 0.40%.

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