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Small Cap International ETFs

Small cap international stocks and the ETFs that hold them have even less correlation to the U.S. stock market than larger foreign stocks. The reason is simple: If the U.S. economy takes a swan dive, it will seriously hurt conglomerates — Nestle, Toyota, and British Petroleum, for example — that serve the U.S. market, regardless of where their corporate headquarters are located.

A fall in the U.S. economy and U.S. stock market is less likely to affect smaller foreign corporations that sell mostly within their national borders.

Regardless of the investment vehicle you choose, a good chunk of your international stock holdings — perhaps as much as 50 percent, if you can stomach the volatility — should go to small cap holdings. The two ETFs you should consider are from Vanguard and iShares. Note that there are considerable differences between the two.

Vanguard FTSE All-World ex-US Small Cap Index (VSS)

Indexed to: The FTSE Global Small Cap ex-US Index, which tracks more than 3,000 small cap company stocks in both developed nations (76 percent of the stocks) and emerging markets (24 percent)

Expense ratio: 0.33 percent

Top five country holdings: Canada, United Kingdom, Japan, Taiwan, Australia

For exposure to small cap international, you aren’t going to find a less expensive or more diversified avenue. This fund trades commission-free if held at Vanguard.

iShares MSCI EAFE Small Cap Index (SCZ)

Indexed to: The MSCI EAFE Small Cap Index, which tracks more than 2,300 stocks from developed market nations other than the United States

Expense ratio: 0.40 percent

Top five country holdings: Japan, United Kingdom, Australia, Germany, Switzerland

Although a little more expensive than the Vanguard offering, this fund is still an excellent choice for international small cap exposure.

Note, however, that unlike the Vanguard ETF, SCZ does not allocate any portion of its portfolio to emerging markets. If you own SCZ and you want that exposure, you might consider a modest position in one of a handful of small cap emerging market ETFs, such as the SPDR S&P Emerging Markets Small Cap (EWX) or the WisdomTree Emerging Markets SmallCap Dividend ETF (DGS).

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