State Street's New International ETFs: Global Small Cap Fund the Real Winner

State Street Global Advisors (SSgA) launched two new exchange-traded funds on the American Stock Exchange this morning, including an international small cap fund that’s likely to be a hit with investors.

The SDPR S&P International Small Cap ETF (AMEX: GWX) will focus on companies in developed markets with market capitalizations below $2 billion. It will charge 60 basis points in expenses.

The SPDR S&P World ex-US ETF (AMEX: GWL) will track an index of 5,000+ companies from developed markets outside the U.S., but including Canada. GWL is the second major international ETF to launch this year that features exposure to Canada, following in the footsteps of the Vanguard FTSE All World US ETF (AMEX: VEU). That distinguishes these funds from the market leader (by assets), the iShares MSCI EAFE (NYSE: EFA) ETF, which turns a blind eye America’s neighbor to the north. MSCI’s indexing system lumps the U.S. and Canada into one “North America” region, although few U.S. investors include Canadian exposure in their “domestic” equity assets.

The Vanguard and SSgA funds differ in three ways: First, VEU includes exposure to emerging markets, while GWL does not; second, GWL charges 35 basis points, while VEU charges just 25; finally, GWL tracks an index of over 5,000 companies, while VEU focused down on just 2,200 names.

EFA also charges 35 basis points in expenses.

Diversifying With Small-Cap
Although GWL is a nice addition to SSgA’s fund family, the real winner in the launch is GWX—the small-cap fund. Investors have become increasingly interested in small-cap international, as they have gradually become disenchanted with the vanishing correlation benefits formerly associated with large-cap international exposure.

In the “good old days,” investors bought large-cap international exposure to diversify portfolios focused on U.S. stocks. But with the dawn of globalization, a modern large-cap company --- whether headquartered in the U.S., Europe or Asia --- is a really a multinational firm, with profits and growth tied more to the global economy than any particular local factor. As a result, the correlation between large-cap international and U.S. equities have been increasing.

Small-cap international, in contrast, is still tied more closely to the performance of local markets. As a result, investors have been turning to small-cap international exposure to fill the diversifying roll previously held by large-cap international.

WisdomTree (WSDT.PK) is the leader in the small-cap international ETF space. Its WisdomTree International SmallCap Dividend Fund (NYSE: DLS) was the first broad-market international small-cap portfolio, and has gathered over $425 million since inception on June 16, 2006.

State Street has also tasted success in the global small-cap market, with its SPDR Russell/Nomura Small Cap Japan ETF (AMEX: JSC), Launched in November 2006, JSC already has over $150 million in assets.

The prospectus for the new SSgA funds is available here.