The outperformance we’ve seen in domestic stocks, and those of developed nations compared to international developing markets in recent years may entice investors looking for value to target specific companies with growth potential in these markets. Such an approach may pay dividends, if we see this valuation gap close, or at least narrow, in the coming years.
Indeed, there are some substantial reasons to believe international small caps may continue to underperform for some time. The quality of the earnings these companies provide are much lower than those in developed countries. That said, these companies tend to have substantially lower debt ratios. Their balance sheets tend to be cleaner, and their debt multiples also lower. From the perspective of a conservative long-term investor, it seems clear where the better risk-return options lie.
Accordingly, for those so inclined to add some exposure to this sector, one ETF I like tracking international small caps is the DFA International Small Value ETF (DISVX). This ETF holds a broadly diversified portfolio of small cap companies around the world, excluding developed markets.
Of course, this has meant underperformance in recent years as developed markets have taken the lion’s share of capital inflows. However, if one is a contrarian investor, or even a fundamental investor, betting that at some point these stocks will revert toward a longer-term mean, then picking up diversified exposure to this trend could be a very wise move right now.
Invest wisely, my friends.
