ETFs That Give You Foreign Small-Cap Exposure

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Usually, new large-cap ETFs seem to come from the redundancy department, but that's not so with small-caps. The thing about the small-cap space is that two funds that appear to do the same thing can be very different, so sometimes the best choice, for diversification's sake, might not be one or the other but both.

Frankly, there is nothing that says you should pick one and just stick to it for all time.

An often overlooked piece of the diversification puzzle is foreign small-cap stocks, primarily because these stocks can be difficult to access. A few months ago, WisdomTree launched the first ETF in the space; the WisdomTree International Small-Cap Dividend ETF (DLS). Last week, StateStreet launched the SPDR S&P International Small-Cap ETF (GWX).

DLS and GWX are different enough that a combination of both stands to be a better mix than one alone. The indices underlying both have strong back-test results: DLS has averaged 17.76% annualized for 10 years, and GWX has averaged 11.25% annualized over the same time period, compared with 8.67% annualized for the MSCI EAFE Index, 8.2% for the S&P 500 and 10.23% for the Russell 2000.

While the results for DLS have been much better, I believe it has benefited from a skew to value during this decade. And while it may be tough to guess when growth will rotate back into favor, a mix of both funds means you don't have to be right about when growth takes the mantle.