Vanguard ETF Targets International Small Caps
April 6, 2009

SAN DIEGO (ETFguide.com) – The Vanguard Group has just introduced a new exchange-traded fund or ETF that is linked to the performance of foreign small cap stocks.

The Vanguard FTSE All-World ex-US Small-Cap ETF (NYSEArca: VSS) contains approximately 2,100 securities and will offer investors market coverage to a frequently overlooked area of the equity universe. According to the prospectus, the fund’s annual expense ratio is 0.38%.

VSS will compete with the SPDR S&P International ETF (NYSEArca: GWX), which has around $254 million in assets. GWX follows an index of 4,000 small cap stocks domiciled outside of the U.S. and charges annual expenses of 0.60%. GWX only contains market exposure to small caps in developed countries, whereas VSS covers small caps in both developed and emerging markets. In 2008, GWX declined by 16.71%.

WisdomTree Investments offers one international small cap equity fund but with a dividend (NYSEArca: DLS) bias. The fund was launched in mid-2006 and charges annual expenses of 0.38%.

“Many advisors are committed to providing international exposure within their clients’ portfolios, but until now a low-cost index option with developed and emerging market small-cap exposure was not available,” said Martha Papariello, principal, Vanguard Financial Advisor Services. “VSS serves as the ideal complement to Vanguard FTSE All-World ex-US ETF (NYSEArca: VEU), which was introduced in March 2007 and holds mid- and large-cap securities.”

VSS will also offer an alternative for mutual fund investors. For example, the DFA International Small Cap Value Fund (NasdaqGM: DISVX) can only be purchased through a select group of investment advisors. Since VSS is traded like a stock, any investor with a brokerage account can get exposure to foreign small cap stocks.

According to ETFguide’s Index Strategy Maps (see below), VSS selects small-cap international stocks passively and subsequently weights them by market capitalization. The index is rebalanced semi-annually.

With a historically low correlation to U.S. small-cap stocks, international small-cap ETFs can further diversify a portfolio containing only domestic and international large- or mid-cap stocks.

Including the newly launched fund, Valley Forge, PA-based Vanguard currently manages 39 ETFs with $44 billion in assets.

--Index Strategy Map for Vanguard FTSE All-World  ex-US Small Cap ETF (NYSEArca: VSS)