With domestic small-cap stocks and the related exchange traded funds flourishing, some investors may feel compelled to examine international equivalents. The Schwab International Small-Cap Equity ETF (NYSEArca: SCHC) is a cost-effective idea among international small-cap exchange traded funds.
The $2.2 billion SCHC, which is more than nine years old, tracks the FTSE Developed Small Cap ex US Liquid Index. Countries represented in that benchmark are developed economies.
“While the portfolio excludes stocks from emerging markets, it still effectively diversifies stock-specific risk. Its 10 largest holdings account for only 4% of its assets,” said Morningstar in a recent note. “However, its country composition is biased toward the Canadian market, which makes it riskier than its average Morningstar Category peer. Canadian small-caps feature a heavy dose of companies in the materials and energy sectors. These types of companies are risky because of their exposure to volatile commodity prices, so they can add to the fund’s risk.”
Japan and Canada combine for 35.42% of SCHC’s geographic exposure. SCHC’s top 10 geographic weights combine for about 80% of the fund.
Examining SCHC ETF
SCHC holds 2,133 stocks, giving it a sizable roster and an annual fee of 0.12%, or $12 on a $10,000 investment, compares favorably with the category average.
“One of the benefits associated with foreign small-cap stocks is their ability to better diversify a portfolio of U.S. stocks,” said Morningstar. “They tend to have slightly lower correlations with U.S. stocks than large-caps listed overseas. Over the trailing 10-year period through April 2019, this fund’s target index, the FTSE Developed Small Cap ex US Index, and the Russell 3000 had a correlation of 0.84. Meanwhile, the large-cap-focused FTSE Developed Ex US Index and the Russell 3000 had a correlation of 0.89 over the same period.”
SCHC allocates 21.5% of its weight to the industrial sector while the consumer discretionary and real estate sectors combine for 23.8% of the fund’s weight.
“The portfolio’s exclusion of emerging-markets stocks causes its country weightings to look different from the category norm,” according to Morningstar. “A typical peer has about 6% of its assets invested in Canadian stocks, while the fund is closer to 15%. Collectively, the materials and energy sectors account for about 40% of the Canadian small-cap market. So, overweighting Canadian stocks directly causes the fund to overweight stocks from these sectors. This has made the fund more volatile than many of its competitors.”
Morningstar has a Bronze rating on SCHC.
For more information on small-capitalization stocks, visit our small-cap category.
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