Using Diversified ETFs For European Small-Cap Exposure

U.S. small caps have not delivered much to be excited about this year, as the Russell 2000 – the benchmark small-cap index – is off 3.2 percent year-to-date.

However, the possibility of more quantitative easing from the European Central Bank (ECB) could spell opportunity with European small caps.

Gaining Exposure To Smaller Euro Stocks

Fortunately for conservative investors, they do not need to buy small-cap-specific exchange-traded funds to get exposure to smaller European stocks; some well-known, diversified Europe ETFs feature robust small-cap exposure. That includes the Vanguard FTSE Europe ETF VGK, the second-largest Europe ETF by assets.

Vanguard ETFs

Earlier this year, Vanguard announced index changes for some of its international ETFs, but market observers primarily focused on the addition of China A-shares to the Vanguard Emerging Markets Stock Index Fd VWO. Lost in the shuffle was VGK transitioning to an index with more exposure to European small caps.

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As S&P Capital IQ pointed out in a research note out Tuesday, the weighted average market capitalization of VGK's holdings is $69 billion, ahead of the $66 billion found on the rival iShares Core MSCI Europe ETF (iShares Trust IEUR).

VGK's Move

VGK, which is not a currency-hedged ETF, is transitioning to the FTSE Developed Europe All Cap Index.

“The average market cap of the All Cap index was $29 billion, with more than 700 small-cap companies not in the previously used index. Small-caps represent approximately 10 percent of the All-Cap index. Despite the additional holdings, sector exposure is largely the same with financials (23 percent of assets), health care (14 percent) and consumer staples (13 percent) the most represented,” said S&P Capital IQ.

“In the three-year period ended September 2015, the FTSE Developed Europe All Cap index rose 7.5 percent on an annualized basis, ahead of the 6.9 percent of FTSE Developed Europe index. Meanwhile, the three-year standard deviation of 15.0 for the All Cap was slightly below the 15.1 for its peer; the ten-year standard deviation of 21.0 was slightly higher for the All Cap.”

Europe Small-Cap ETFs

There are dedicated Europe small-cap ETFs, including the new WisdomTree Europe Hedged SmallCap Equity Fund EUSC.

EUSC, which debuted in March, is the small-cap answer to the wildly popular WisdomTree Inter Hedged Eq Fund HEDJ. HEDJ is this year's top asset-gathering ETF and now the largest Europe ETF.

Like HEDJ, EUSC is a currency hedged ETF, and it is also a dedicated eurozone fund, so investors will not find exposure to British or Swiss stocks here as they will with IEUR or VGK.

EUSC's largest country weight is 21 percent to Italy, one of the largest weights to that country among any ETF that is not an Italy-specific fund.

EUSC has raked in almost $225 million in assets, making it one of the most successful ETFs to debut in 2015.

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