Investors have long embraced small-caps. That’s because of higher growth prospects and diversification within portfolios that often lean into large-caps. But in recent years, domestic smaller stocks have left investors wanting more.
For the three years ending November 11, the Russell 2000 and S&P SmallCap 600 indexes returned 42.1% and 31%, respectively. That badly trails U.S. large-caps. But that period wasn’t an outright disaster for smaller stocks. In fact, impressive showings were delivered outside the U.S. Just look at the WisdomTree International SmallCap Dividend Fund (DLS ).
DLS is home to nearly $989 million in assets under management. It turns 20 years old next June so it’s neither new nor small. But over the aforementioned three-year period, DLS returned almost 66%.That trounced U.S. small-caps benchmarks along the way. It’s possible the ETF will keep the good times rolling in 2026.
DLS Cost of Admission Is Low
DLS and other international small-caps ETFs haven’t been getting much attention. Perhaps they should and the reasons extend beyond impressive performance. Data indicates that even with the recent bullishness among ex-U.S. small stocks, the asset class remains attractively valued.
“International small cap ETFs trade on average at 12x forward earnings vs. 15x their larger peers and 27x US large stocks; and are growing earnings at a faster pace. International small value stocks are a good diversifier to US large growth, with a correlation of only 0.4,” according to Bank of America research.
Two results of ex-U.S. small-caps not generating much buzz in the mainstream are these stocks aren’t as widely followed by analysts or has heavily owned by institutional investors as are international large-caps. However, that relative anonymity arguably belies opportunity with assets like DLS.
The Right Geographic Mix
To its credit, the WisdomTree ETF could be ideal for U.S. investors. That’s because it has the potential to outperform domestic small-caps while refreshing portfolios heavily devoted to U.S. large- and megacap equities.
“Compared to the S&P 500, international small cap funds have greater allocations to real asset-exposed sectors like industrials (15% overweight), materials (11%), and real estate (6%), with less invested in tech and communications,” added Bank of America.
Additionally, DLS has the right geographic mix. Japan at 26.35% is by far the ETF’s biggest country weight. That’s a plus at a time when analysts and investors are constructive on Japanese small-caps.
Greater Exposure to Japan
“International small caps have benefitted from differing country exposures as well. Notably, international small cap funds have greater exposure to Japan, a top performer in global equities due to corporate reform (8% overweight),” concluded Bank of America.
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