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There is at least one good reason why most investors should consider
investing a portion of
their portfolios in foreign stocks:
 | Foreign stocks have imperfect correlations with domestic stocks,
so including them in a portfolio should improve the
portfolio's risk/return characteristics. |
For more information on investing overseas, see
here.
Further, there are at least two good reasons why most investors invest a portion of
their portfolios in small cap stocks:
| Small-Cap stocks may have better long-term risk-adjusted returns than
large-cap stocks.
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| Small-Cap stocks have relatively low correlations with large-cap stocks,
so including them in an otherwise large-cap stock portfolio should improve the
portfolio's risk/return characteristics. |
There are several similar-seeming investment options
available. Which is best?
The funds are listed in rough order of our overall preference.
Preferences are listed separately for use in
retirement accounts and for taxable accounts.
For a listing of our preferences in other asset classes, see
here.
Retirement Accounts (i.e., tax-deferred or tax-exempt accounts)
| DFA International Small Company Portfolio (DFISX). E/R: 0.45%.
This fund invests in the DFA Continental Small Company Portfolio (DFCSX), the
DFA Japanese Small Company Portfolio (DFJSX), the DFA Asia Pacific Small
Company Portfolio (DFRSX), and the DFA United Kingdom Small Company Portfolio
(DFUKX). Each of those funds, in turn, invests in small cap stocks in
its respective geographical areas. We ranked this fund above the
alternatives below because we expect the underlying securities to be quite a
bit smaller in market cap in DFISX than other funds below.
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| Schwab International Small Cap Equity ETF (SCHC). E/R: 0.20%.
This ETF tracks the FTSE Developed Small Cap ex-US
Liquid Index of small cap stocks in developed
market countries outside of the US. We ranked it above SCZ
because it is less expensive. For more information on ETFs, see here.
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| iShares MSCI EAFE Small Cap Index Fund (SCZ). E/R: 0.40%.
This ETF tracks the MSCI EAFE Small Cap Index of small cap stocks in developed
market countries outside of North America. For more information on ETFs, see here.
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| SPDR S&P International Small Cap ETF (GWX). E/R: 0.40%.
This ETF invests in companies with market capitalizations below $2 billion
domiciled in developed countries outside the U.S. We ranked this fund
above DLS primarily because it is more diversified (i.e., it includes
non-dividend paying stocks). For more information on ETFs, see here.
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| Invesco FTSE RAFI Developed Markets ex-U.S. Small-Mid Portfolio (PDN). E/R: 0.49%.
This is an ETF which tracks the FTSE RAFI Developed Markets ex-U.S. Mid-Small
1500
Index of non-US developed market small cap stocks. The index
weights the stocks by four measures of fundamental value: book value, cash
flow, sales and dividends.
The stocks owned by this fund
aren't terribly small, compared with our first choice above. For more information on ETFs, see here.
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| WisdomTree International SmallCap Dividend Fund (DLS). E/R: 0.58%.
This is an ETF which tracks the WisdomTree International SmallCap Dividend
Index. This index is built by removing the 300 largest (by market cap)
companies in the WisdomTree Dividend Index of Europe, Far East Asia and
Australasia (the “WisdomTree DIEFA Index”). Then, the 75% largest market
capitalization companies of those remaining are removed. The index
weights the remaining companies by the cash value of their dividend payouts.
The stocks owned by this fund
aren't terribly small, compared with DFISX above. Further, this fund excludes non-dividend paying stocks which otherwise would make the
fund more diversified. For more information on ETFs, see here.
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| Vanguard FTSE All-World ex-US Small Cap Index ETF (VSS). E/R: 0.20%.
This is an ETF which tracks the FTSE All-World ex-US Small Cap Index of non-US small cap stocks. The index
includes both developed and emerging markets stocks.
The inclusion of emerging markets stocks is why this fund is rated poorly
here. For more information on ETFs, see here. |
| Schwab International Small Cap Equity ETF (SCHC). E/R: 0.20%.
This ETF tracks the FTSE Developed Small Cap ex-US
Liquid Index of small cap stocks in developed
market countries outside of the US. We ranked it above SCZ
because it is less expensive. For more information on ETFs, see here.
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| iShares MSCI EAFE Small Cap Index Fund (SCZ). E/R: 0.40%.
This ETF tracks the MSCI EAFE Small Cap Index of small cap stocks in developed
market countries outside of North America. For more information on ETFs, see here.
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| SPDR S&P International Small Cap ETF (GWX). E/R: 0.40%.
This ETF invests in companies with market capitalizations below $2 billion
domiciled in developed countries outside the U.S. We ranked this fund
above DFISX primarily because we expect it to be more tax-efficient (i.e.,
as an ETF, we expect it to be perfectly capital-gains tax-efficient). We ranked this fund
above DLS primarily because it is more diversified (i.e., it includes
non-dividend paying stocks). For more information on ETFs, see here.
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| Invesco FTSE RAFI Developed Markets ex-U.S. Small-Mid Portfolio (PDN). E/R: 0.49%.
This is an ETF which tracks the FTSE RAFI Developed Markets ex-U.S. Mid-Small
1500
Index of non-US developed market small cap stocks. The index
weights the stocks by four measures of fundamental value: book value, cash
flow, sales and dividends.
For more information on ETFs, see here.
|
| DFA International Small Company Portfolio (DFISX). E/R: 0.45%.
This fund invests in the DFA Continental Small Company Portfolio (DFCSX), the
DFA Japanese Small Company Portfolio (DFJSX), the DFA Asia Pacific Small
Company Portfolio (DFRSX), and the DFA United Kingdom Small Company Portfolio
(DFUKX). Each of those funds, in turn, invests in small cap stocks in
its respective geographical areas. While we expect this fund's holdings
to be smaller on average than the above funds ranked above it (in small-cap
funds, smaller stocks makes it better, all else being equal), we rate this
fund somewhat below them because, as a non-ETF, this fund is expected to be
less tax efficient.
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| WisdomTree International SmallCap Dividend Fund (DLS). E/R: 0.58%.
This is an ETF which tracks the WisdomTree International SmallCap Dividend
Index. This index is built by removing the 300 largest (by market cap)
companies in the WisdomTree Dividend Index of Europe, Far East Asia and
Australasia (the “WisdomTree DIEFA Index”). Then, the 75% largest market
capitalization companies of those remaining are removed. The index
weights the remaining companies by the cash value of their dividend payouts.
The stocks owned by this fund
aren't terribly small, compared with our first choice above. Further, this fund excludes non-dividend paying stocks which otherwise would
make the fund more tax-efficient (and more diversified). For more information on ETFs, see here.
|
| Vanguard FTSE All-World ex-US Small Cap Index ETF (VSS). E/R:
0.20%. This is an ETF which tracks the FTSE All-World ex-US Small Cap
Index of non-US small cap stocks. The index includes both developed and
emerging markets stocks. The inclusion of emerging markets stocks is why
this fund is rated poorly here. While ETFs
tend to be more tax efficient than conventional mutual funds, Vanguard ETFs
are an exception — these ETFs will be merely as tax efficient as
their underlying conventional funds — VFSVX (no
more, no less), but with a lower expense ratio. For more information on ETFs, see here.
For more information on ETFs, see here. |
This web page contains the current opinions of Eric E. Haas at the time it is
written — and such opinions are subject to change
without notice. This web page is intended to serve two purposes:
| To educate the public; and |
| To provide disclosure of Mr. Haas' opinions to prospective clients.
We believe that prospective clients are well-served by being made aware of
what they are buying — and what they are buying is advice
that is based on these opinions. |
We believe the information provided here to be useful and accurate at the time
it is written.
Information contained herein has been obtained from sources believed to be
reliable, but is not guaranteed.
No investor should invest solely on the basis of information listed here.
Before investing, it is important to consult each prospective investment's
prospectus and consider both its risk/return characteristics and its effect on
your overall portfolio.
This information is not intended to be a
substitute for specific individualized tax, legal, or investment planning
advice. Where specific advice is necessary or appropriate, Altruist
recommends consultation with a qualified tax adviser, CPA, financial planner, or
investment adviser. If you would like to discuss the rationale or support
for any particular idea expressed on this web page, feel free to
contact us. |
