Getting small-cap exposure with international exposure can add a component of growth tinged with diversification in their portfolios. Given the current unknowns in the market environment, it might be difficult for risk-averse investors to fathom, but there are options that exist.
The fears are warranted when it comes to small-caps. In the event of a market downturn, the losses can be amplified, but should markets rally, the pain could be worth the potential pleasure.
As a Wall Street Journal report noted, small-cap equities “tend to be sensitive to fears of an economic slowdown, since they often generate the majority of their sales in the U.S., compared with large multinationals. Even though many investors and analysts remain nervous about the potential of a recession, some say that after a brutal first half, the group looks due for a rebound.”
“I would argue that a lot of the bad news is probably already in small caps,” said Jurrien Timmer, director of global macro at Fidelity Investments. “That’s a glass half-full way of reading the tea leaves.”
Adding Quality in Small-Cap Exposure
Investors who may be considering small-cap exposure, but want to mitigate risk due to the potential of a recession may want to consider an active management strategy that focuses on value. Additionally, for investors who want extra diversification in their portfolios via international equities with the growth potential of small-caps, there’s one exchange traded fund (ETF) worth considering.
As such, one fund ETF investors may want to note is the Avantis International Small Cap Value ETF (AVDV), which mainly invests in a broad group of non-U.S. small-cap value companies believed to have higher expected returns across developed market countries, sectors, and industries.
Highlights of AVDV:
- Invests in a broad set of non-U.S. developed small-cap companies and is designed to increase expected returns by focusing on firms believed to be trading at low valuations with higher profitability ratios.
- Pursues the benefits associated with indexing (diversification, low turnover, transparency of exposures), but with the ability to add value by making investment decisions using information in current prices.
- Efficient portfolio management and trading process that is designed to enhance returns while seeking to reduce unnecessary risks and costs for investors.
- Built to fit seamlessly into an investor’s asset allocation.
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