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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: 0.39%.
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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| DFA International Small Cap ETF (DFIS). E/R: 0.39%.
This fund invests in small companies in developed mkt countries outside the
US.
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| Schwab International Small Cap Equity ETF (SCHC). E/R: 0.11%.
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.
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| iShares MSCI EAFE Small Cap Index Fund (SCZ).
E/R: 0.39%. This ETF tracks the MSCI EAFE Small Cap Index of small cap
stocks in developed market countries outside of North America.
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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).
|
| 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.
|
| 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. Further, this fund excludes non-dividend
paying stocks which otherwise would make the fund more diversified.
|
| Vanguard FTSE All-World ex-US Small Cap Index ETF (VSS).
E/R: 0.07%. 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. |
| DFA International Small Cap ETF (DFIS). E/R: 0.39%.
This fund invests in small companies in developed mkt countries outside the
US.
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| Schwab International Small Cap Equity ETF (SCHC). E/R: 0.11%.
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.
|
| iShares MSCI EAFE Small Cap Index Fund (SCZ).
E/R: 0.39%. This ETF tracks the MSCI EAFE Small Cap Index of small cap
stocks in developed market countries outside of North America.
|
| 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).
|
| 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.
|
| 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. Further, this fund excludes non-dividend
paying stocks which otherwise would make the fund more tax-efficient (and
more diversified).
|
| Vanguard FTSE All-World ex-US Small Cap Index ETF (VSS).
E/R: 0.07%. 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. |
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. |
