International Small Caps: Higher Returns Than U.S. Small Caps?

Small-cap stocks offer growth potential, but should investors look beyond U.S. borders?
International small-cap stocks provide exposure to companies in other countries, potentially
offering higher returns. This article compares international and U.S. small-cap stocks to help
you decide which might be a better fit for your investment strategy.

Understanding Small-Cap Stocks

Small-cap stocks are shares of companies with relatively small market capitalizations (total
value of outstanding shares). They are generally considered riskier but have higher growth
potential than large-cap stocks.

U.S. Small-Cap Stocks

U.S. small-cap stocks represent smaller companies in the United States.

Pros:

• Familiarity: Investors are often more familiar with the U.S. market and regulatory environment.
• Liquidity: U.S. markets are highly liquid, making it easy to buy and sell shares.
• Growth Potential: U.S. small caps can offer significant growth opportunities.

Cons:

• Volatility: Small-cap stocks are generally more volatile than large-cap stocks.
• Economic Sensitivity: They can be more sensitive to U.S. economic conditions.

International Small-Cap Stocks

International small-cap stocks are shares of smaller companies located in countries outside the
United States.

Pros:

• Diversification: Provide geographic diversification, reducing reliance on the U.S. economy.
• Higher Growth Potential (Potentially): Some international markets may have faster economic growth than the U.S.
• Undervaluation Potential: Opportunities to find undervalued companies in less-efficient markets.

Cons:

• Increased Risk: Can be riskier due to factors like currency fluctuations, political instability, and different accounting standards.
• Lower Liquidity: Some international markets may have lower trading volumes and liquidity.
• Information Asymmetry: Access to reliable information may be limited in some countries.

International vs. U.S. Small Caps: Which is More Profitable?

There’s no single answer to which is inherently “more profitable.” Profitability depends on several factors:

1. Economic Growth

• U.S. Small Caps: Tied to the U.S. economy.
• International Small Caps: Can benefit from growth in specific foreign economies.

2. Currency Fluctuations

• U.S. Small Caps: Not directly impacted by currency risk.
• International Small Caps: Returns are affected by changes in exchange rates.

3. Market Efficiency

• U.S. Small Caps: Generally traded in a very efficient market.
• International Small Caps: Some markets may be less efficient, creating opportunities for skilled investors.

4. Risk Tolerance

• U.S. Small Caps: Offer volatility but generally less political and economic risk.
• International Small Caps: Can be more volatile and carry higher political and economic risks.

Investment Strategies

Consider these strategies:

• Diversification: Include both U.S. and international small caps for broader exposure.
• Regional Focus: Target specific regions with strong growth potential.
• ETFs: Use ETFs to gain diversified exposure to international small-cap indices.
• Active Management: Consider actively managed funds to navigate the complexities of international markets.

Conclusion

Both U.S. and international small-cap stocks offer opportunities for growth. International
small caps provide diversification and potential access to faster-growing economies, but they
also come with increased risks. Carefully assess your risk tolerance, investment goals, and
understanding of international markets before making investment decisions.

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small cap stocks, international stock market, foreign stocks, emerging markets, developed
markets, international investing.

Frequently Asked Questions (FAQ)