If you are considering investing in a Developed Markets Small/Mid Cap ETF, the choices are slim. Currently there are only 8 ETFs in this Morningstar category. Three of these ETFs have been available for ten years or longer. Those 3 ETFs will be the focus of this article. **I have not included IDHQ in the rankings in this article because I believe it is inaccurately labeled a Foreign Small/Mid Value ETF; it should be considered a Foreign Large Cap Growth ETF.**
Due to the relatively short time-frame that these ETFs have existed, the performance of this group compared to a basic S&P 500 index fund is not stellar. In fact, the oldest ETF available in the Foreign Developed Market Small Cap asset class has trailed the S&P 500 by nearly 2.5% CAGR (compounded annual growth rate) since its’ inception in June of 2006. But, let’s look back further and see how this asset class has performed vs the S&P 500. To do this, I will be referencing my investing mentor, Paul Merriman.
In May 2015, Paul published this article on MarketWatch, “It’s a small world after all: International small-cap value”. Here is a short excerpt from that article:
“In the international stock market, reliable data doesn’t go back that far. But using the 33 calendar years from 1982 through 2014 gives us a reasonably long snapshot.
This period includes two major bear markets, two strong recoveries and a strong U.S. bull market during the 1990s in which the S&P 500 outperformed all its competition.
During those 33 years, international small-cap value stocks compounded at 14.3%, compared with 11.8% for the S&P 500.
At those rates, a $100 initial investment would have grown to $8,223 in international small-cap value; in the S&P 500, $100 would have grown to only $3,974.”
Although the last 12 years have not been great for International Small Cap Value stocks, I believe the history of this asset class is worth considering. I am a long-term investor and I have purposely built a worldwide portfolio that captures all equity asset classes that have had good long-term returns. I am taking the long view on this asset class while realizing that the short-term performance may provide less returns than a basic S&P 500 index fund.
Now, let’s move onto the Deep Value ETF Accumulator’s ranking of the Foreign Small/Mid Value ETFs that have existed for ten years or longer.
Source: Morningstar.com
PDN vs DLS vs DIM vs S&P 500: October 2007 – June 2018
Source: https://www.portfoliovisualizer.com/backtest-portfolio
As I stated earlier in this article, the Foreign Small/Mid Value ETFs have trailed the S&P 500 significantly. If choosing to invest in this asset class via ETFs, I would recommend either PDN or DLS.
Now let’s see at how these 3 ETFs are constructed by looking at the fund family’s product details.
PDN – Invesco FTSE RAFI Developed Markets ex-U.S. Small-Mid ETF. The Invesco FTSE RAFI Developed Markets ex-U.S. Small-Mid ETF (Fund) is based on the FTSE RAFI Developed ex U.S. Mid-Small 1500 Index (Index). The Fund will normally invest at least 90% of its total assets in securities that comprise the Index and American Depository Receipts (ADRs) based on the securities in the Index. The Index is designed to track the performance of small and mid-capitalization equities of companies in developed international markets (excluding the US), selected based on the following four fundamental measures of firm size: book value, cash flow, sales and dividends. The equities are based on their fundamental strength and are weighted according to their fundamental scores. The Index is computed using the net return, which withholds applicable taxes for non-resident investors. The Fund and the Index are reconstituted annually.
DLS – WisdomTree International SmallCap Dividend Fund seeks to track the investment results of dividend-paying small-cap companies in the developed world ex the U.S. and Canada. Why DLS? Gain exposure to developed international world, ex-U.S. and Canada small cap equity from dividend paying companies. Use to complement or replace international developed small cap broad based active and passive strategies. Use to satisfy demand for income and growth potential.
DIM – WisdomTree International MidCap Dividend Fund seeks to track the investment results of dividend-paying mid-cap companies in the developed world ex the U.S. and Canada. Why DIM? Gain exposure to developed international world, ex-U.S. and Canada mid cap equity from dividend paying companies. Use to complement or replace international developed mid cap broad based active and passive strategies. Use to satisfy demand for growth potential and income focus.
The potential investor in the Foreign Small/Mid Value asset class needs to determine whether this asset class is worth the risk before adding it to their portfolio. I have reviewed the historical returns and weighed the risks vs potential rewards of this asset class and have decided that we will put a portion of our investments in it.
Thank you for taking time to read this article. If you found it useful, please share it with a friend.
Respectfully yours, Micah McDonald, aka the Deep Value ETF Accumulator
Disclosure: I intend to buy shares of PDN in the future. I am not a professional investment advisor. Please do your own due diligence or consult a Registered Investment Advisor prior to investing in any fund mentioned in this article.