The Bottom Line
- U.S. small-cap stocks have captured the imagination of investors through the years, at least in part due to potential for rapid growth and product innovation associated with companies in this asset class.
- Yet international small-caps are often overlooked, despite the wealth of opportunity. There are nearly twice as many small-caps outside the U.S., with over twice the overall market value as the U.S. small-cap universe. However, only about 1% of U.S. mutual fund assets are invested in small-caps outside the U.S.
- Royce & Associates notes that non-U.S. small-caps share many of the attributes that make their U.S. counterparts so attractive, including similarly strong 10-year annualized returns and Sharpe Ratios.
- In addition, non-U.S. small-caps have lower volatility than U.S. small-caps, which could be due to the prevalence of dividend-payers; over 80% of the companies in the international small-cap index paid dividends as of 12/31/2018.
- Those interested in international small-caps should recognize that the sector receives relatively sparse coverage by research analysts. As a result, small-cap managers with their own deep fundamental research capabilities may possibly have an information advantage in this often-neglected segment of the market.
The MSCI ACWI ex USA Small Cap Index is an unmanaged, capitalization-weighted index of global small-cap stocks, excluding the United States. Index returns include net reinvested dividends and/or interest income.
The Russell 2000 Index is an unmanaged list of common stocks that is frequently used as a general performance measure of U.S. stocks of small and/or midsize companies.
A Sharpe Ratio is a risk-adjusted measure of investment return. The higher the Sharpe ratio, the better the fund's historical risk-adjusted performance.