Small-cap stocks are currently experiencing notably low valuations compared to their larger counterparts. Furthermore, international stocks are being traded at discounts in relation to U.S.-listed equities, creating a unique opportunity for investors.
One of the investment vehicles well-suited to capitalize on this advantageous landscape is the Vanguard FTSE All-World ex-U.S. Small-Cap Index ETF (VSS). This exchange-traded fund focuses on small-cap companies with exposure to international markets, thereby appealing to investors looking to diversify their portfolios beyond U.S. borders.
The Vanguard All-World ex-U.S. Small-Cap Index ETF is designed to provide exposure exclusively to smaller firms outside of the United States, categorizing them as international small-cap stocks. These companies boast an average market capitalization of approximately $2.1 billion. Notably, this is distinct from a global ETF, which would include stocks from both domestic and international markets.
The portfolio of this ETF contains around 4,950 small-cap stocks. Only about 11% of its assets are allocated to North American companies (primarily from Canada). The remainder is composed of a diverse array of international stocks, with 33% based in Europe, 27% situated in developed nations within the Asia-Pacific region, and 28% based in emerging markets. This geographical diversification underscores the ETF’s broad international reach.
Additionally, one of the appealing aspects of the Vanguard All-World ex-U.S. Small-Cap Index ETF is its lack of concentration in individual stocks. In contrast to many index funds, which may heavily weight their portfolios towards a handful of top holdings, no single stock within this ETF constitutes more than 0.23% of its total assets. This stands in stark contrast to the S&P 500, where a significant portion of the fund’s assets is concentrated in just ten holdings.
Cost efficiency is another strength of Vanguard ETFs, and the All-World ex-U.S. Small-Cap Index ETF exemplifies this with a low expense ratio of just 0.06%. This means that for every $10,000 invested, the annual fees amount to only $6—a minimal cost that does not need to be paid upfront, but is instead reflected in the ETF’s performance over time.
Given the current market conditions, this ETF presents an excellent opportunity for long-term investors looking for access to international small-cap stocks at a bargain price. The average stock in the portfolio is trading at a mere 1.6 times its book value, significantly lower than the 2.1 price-to-book ratio of the domestic Russell 2000 small-cap index and well below the large-cap S&P 500 index’s average of 4.8.
With its broad diversification, low costs, and attractive valuations, the Vanguard FTSE All-World ex-U.S. Small-Cap Index ETF could be an essential addition for patient investors looking to enhance their portfolios.
