The Best Smallcap International ETF? That Depends

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 |  Includes: DLS, GWX, IEUS, PDN, SCZ
by: IndexUniverse

With last week's launch of an iShares MSCI EAFE Small Cap ETF (NYSEARCA:SCZ), investors now have five choices in this hot space. How do you figure out which one is the best?

I worry that most investors don’t even bother. They figure that one small-cap international ETF is as good as another, so they just pick one and go. But one thing I’ve learned from studying this space is that different ETFs within the same asset class can be very different, and it pays to look closely.

Consider the four small-cap international ETFs investors can choose from today. Even looking only at top-line performance, the variability is huge. Over the past year, the spread between the high-performing ETF (NYSEARCA:DLS) and low-performing ETF is approximately 7.5%. Moreover, the differences on a 3- and 5-year basis are notable too.


Small Cap International ETFs

Fund

Ticker

ER

1-Yr

3-Yr

5-Yr

iShares MSCI EAFE Small-Cap

SCZ

0.40%

21.71%

24.30%

28.55%

iShares FTSE Developed Ex-US Small Cap

IFSM

0.50%

27.49%

28.22%

30.87%

PowerShares FTSE RAFI Developed Ex-US Small-Mid

PDN

0.75%

22.28%

24.85%

29.27%

SPDR S&P International Small Cap

GWX

0.58%

27.07%

26.73%

29.7%

WisdomTree International SmallCap Dividend Fund

DLS

0.60%

29.19%

28.90%

32.75%

Data as of September 30, 2007. Data from each index provider. Returns are annualized index returns.

Click to enlarge


When you drill down, you realize that these differences are not coincidental. The four different ETFs have remarkably different country weights.

Depending on how you feel about different markets, you can fine-tune your exposure carefully. If you’re a bull on Japan, PDN is your bet; if you like Australia, DLS is you're bet; and if you’re a bear on the U.K., GWX is the choice. (GWX is also the only fund with exposure to Korea, and one of just two funds with significant exposure to Canada.)

Fund

Ticker

Japan

U.K.

Australia

Canada

Korea

iShares MSCI EAFE Small-Cap

SCZ

24.80%

19.80%

8.50%

0.00%

0.00%

iShares FTSE Developed Ex-US Small Cap

IFSM

15.85%

24.13%

5.81%

0.00%

0.00%

PowerShares FTSE RAFI Developed Ex-US Small-Mid

PDN

33.88%

12.06%

5.58%

5.92%

0.00%

SPDR S&P International Small Cap

GWX

24.02%

12.03%

10.02%

10.88%

7.23%

WisdomTree International SmallCap Dividend Fund

DLS

22.27%

18.58%

18.10%

0.00%

0.00%

Click to enlarge


Of course, WisdomTree’s dividend screen throws a kink into the works. DLS was the first small-cap international ETF to hit the market, and its one-year performance is top of the field.

It’s probably not surprising that the dividend screen has a major impact on sector exposures. While the other three ETFs are within a margin of error of one another on a sector basis, DLS has notably higher allocations to Consumer Staples, Consumer Discretionary and (especially) Telecom stocks. For instance, while the four competing ETFs (including the FTSE RAFI fund) have less than 1% exposure to telecom stocks, DLS has a healthy 8.55% weight. Do you want exposure to small-cap international telecom firms?

That’s the kind of question you should ask.

So … which ETF is the best? That depends on what you’re looking for. But the point is, make sure you dig down below the surface before you buy.

Written by Matthew Hougan