There are now a variety of small cap international exchange traded funds (ETFs). Small cap international exposure can be an important part of investors’ asset allocations. Theoretically, investors who stay the course and invest for the long run can benefit by investing in this asset class that has low correlations to common indexes and high expected returns. The three ETFs this post focuses on are the WisdomTree International Small Cap Dividend Fund (DLS), SPDR S&P International Small Cap ETF (GWX), and the iShares MSCI EAFE Small Cap Index Fund (SCZ).

WisdomTree International Small Cap Dividend Fund (DLS)
DLS tracks the WisdomTree International Small Cap Dividend Index. This index is fundamentally weighted, different than a traditional index that simply holds shares of each of the corporations that compose the index. According to WisdomTree, the dividend-weighted indexes had the historically highest dividend yields and lowest beta of the factors WisdomTree tested. We believe these are important attributes for investors who may be looking for a more conservative way to generate income on equity investments. Perhaps most critically, our research indicated that dividend-based indexes provided the best preservation of capital in down markets during the periods tested.

DLS Statistics:
Expense Ratio: 0.58 (on 8/31/07 ER increased from 0.38)
12 Month Yield : 2.61%
Premium/Discount: 1.37%
Avg Daily Vol: 41,000
Total Assets: $471 million
Fund Inception: 6-16-06
AVG market cap: $1,168 million - Large (1.3%), Medium (58.1%), Small (35.2%), Micro (5.5%)
Country Exposure: Japan (24.1%), Australia (18.1%), UK (16.6%), Singapore (5.2%), Sweden (4.9%)
Price/Book: 1.7
Price/Cash Flow: 7.5
YTD return: -12.68
1-Year: -22.29
Assets in Top 10%: 6.58%
Avg Beta: 0.971

SPDR S&P International Small Cap ETF (GWX)
Page 36 of the prospectus states that the ETF attempts to replicate the total return performance of an equity index based upon the developed world (ex-US) small cap equity markets. The Fund uses a passive management strategy and “sampling” methodology designed to track the total return performance of the S&P/Citigroup World Ex US Cap Range <2 Billion USD Index. The World Small Cap Index is a market capitalization weighted index .

GWX Statistics:
Expense Ratio: 0.59
12 Month Yield :1.02%
Premium/Discount : 1.16%
Avg Daily Vol: 98,000
Total Assets: $339 Million          
Fund Inception: 4-20-2007
AVG market cap: $961 Million - Medium (52.6%), Small (45.7%), Micro (1.7%)
Country Exposure: Japan (29.1%), Canada (12%), UK (11%), Australia (8.6%), South Korea (4.8%)
Price/Book: 1.6
Price/Cash Flow: 8.3
YTD return: -13.24
1-Year: -20.08
Assets in Top 10%: 5.65%
Avg Beta: 0.951

iShares MSCI EAFE Small Cap Index (SCZ)
The prospectus states that the ETF targets 40% of the eligible small cap universe in each industry group of each country represented by the MSCI EAFE Index. MSCI defines the small cap universe as all listed securities that have a market capitalization in the range of 200-1,500 million USD. Unlike many investment companies, the Fund does not try to “beat” the index it tracks and does not seek temporary defensive positions when markets decline or appear overvalued.

SCZ Statistics:
Expense Ratio: 0.40
12 Month Yield %: 1.3
Premium/Discount %: 1.22
Avg Daily Vol: 84,000
Total Assets: $61 million [Medium (71.58), Small (28.1), Micro (0.32)]
Fund Inception: 12-10-2007
AVG market cap: $1,530 million
Country Exposure: Japan (25.5), United Kingdom (18.9), Australia (7.6), Germany (6.6), France (5.2)
Price/Book: 1.7
Price/Cash Flow: 6.8

Conclusion:
There is not a right answer to which small cap international ETF is best. Rather the answer is dependent on each individual’s specific asset allocation and risk tolerance. DLS is a dividend weighted index. Although the methodology is supported by back tested research, past performance does not strictly dictate future performance. A traditional index such as SCZ or GWX is simply attempting to track an index and therefore may have less tracking error in the long run. The reason this tracking error factor is important is because it is key to stay the course and hold investments for the long run. Investors that are not completely convinced that the DLS methodology will outperform in the long run may be tempted to sell the ETF after poor performance which is exactly the wrong time to sell. Also the expense ratio increase of DLS is somewhat concerning.

SCZ and GWX both offer good indexed small cap international exposure. Although SCZ is 19 bps less expensive then GWS, the average market cap of SCZ is over $500 million greater than GWX. The GWX ETF thus provides greater exposure to the smallest international stocks. The style box breakdown also indicates that GWX has greater exposure to small and micro cap than SCZ. Because of that factor, I think investing in the more expensive GWX is a fine decision for investors seeking to allocate funds to the smallest international stocks.

Related Sites:
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