Reasons for International Small Cap Investing - Diversification
International Small Caps Provide Diversification to Both International Large Cap Stocks and Domestic Small Cap Stocks
International small cap investing can offer diversification to international large cap equity allocations in two key ways. First, since many international large cap allocations are dominated by a small percentage of stocks relative to the entire investable universe (as illustrated in our recent blog post: Reasons for International Investing), the broader universe of investment opportunities in international small cap provides a natural diversifier.
Second, as with many U.S. large cap companies, international large cap companies are generally global in nature (61.5% of their revenue is earned from foreign markets1), reducing the diversifying impact of allocating to U.S. and international large caps. However, the more localized focus of EAFE small cap companies (only 37.5% of their revenue comes from foreign markets2) provides a purer exposure to international investing than that of their large cap brethren, thereby increasing the diversifying effect of adding this asset class to a portfolio.
Many investors use various asset classes to diversify their portfolios. As the exhibit shows below, international small caps have proven more effective at diversifying exposures to domestic large caps than have U.S. small caps or even international large caps.
Data as of 12/31/17. Source: Bloomberg
We encourage you to explore other meaningful reasons to invest in the international small cap asset class in our research paper 4 Reasons to Invest in International Small Cap.
1,2 Source: FactSet as of 12/31/2017
IMPORTANT RISKS AND INVESTMENT CONSIDERATIONS
Equity Risk. The Fund’s equity holdings, including common stocks, may decline in value. The value of a security may decline for a number of reasons, which are detailed in the prospectus.
Foreign & Emerging Markets Investing Risks. As a result of political or economic instability in foreign countries, there can be special risks associated with investing in foreign securities, including fluctuations in currency exchange rates, increased price volatility and difficulty obtaining information. In addition, emerging markets may present additional risk due to potential for greater economic and political instability in less developed countries.
Small Cap Risk. The Fund’s investments in small capitalization companies may be less liquid and their securities’ prices may fluctuate more than those of larger, more established companies.
There can be no guarantee that any strategy (risk management or otherwise) will be successful. All investing involves risk, including the potential loss of principal.