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Foreign Dev Mkts Sml Cap Funds

 

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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:

bulletForeign 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:

bulletSmall-Cap stocks may have better long-term risk-adjusted returns than large-cap stocks.
 
bulletSmall-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)

bulletDFA 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.
 
bulletSchwab 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.
 
bulletiShares 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.
 
bulletSPDR 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.
 
bulletPowerShares 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.
 
bulletWisdomTree 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.
 
bulletVanguard 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.

Taxable Accounts

bulletSchwab 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.
 
bulletiShares 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.
 
bulletSPDR 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.
 
bulletPowerShares 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.
 
bulletDFA 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.
 
bulletWisdomTree 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.
 
bulletVanguard 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.

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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:

bulletTo educate the public; and
bulletTo 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.

 

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