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VanEck looks to capture global small cap heat via new ETF
The Australian exchange-traded fund (ETF) market continues to grow at a phenomenal rate, after inflows for January this year pushed the total ETF market to a new record high of $96.8 billion in total capitalisation. Over the last year the ETF market has grown by 47%, or $30.8 billion, as ETF providers have been busy designing and creating innovative new products to meet the growing demand and investor appetite for ETFs.
Much of the market demand has been focused on international equities, being the most actively traded sector in the last year. International small-cap ETFs provide investors with exposure to stocks located in countries outside the United States, including emerging markets. Usually small-cap-stocks have a market cap of less than $2 billion, which compared to Australian smaller companies would be considered quite large.
There is a strong case for international small-caps just based on their long-term performance. According to New York-based small-cap specialist Royce Invest, the annualised rolling monthly ten-year returns for the international small-cap index exceeded the MSCI ACWI ex-USA Large-Cap index with lower volatility than the US small-cap index.
International ETFs on the ASX saw $31 billion in inflows during January and February this year, compared to $30 billion for all of 2020. The international small-cap sector has roared back to life, mainly due to the trade war. Small caps provide a safe haven because they are domestically focused. Larger-cap stocks have greater international exposure and hence represent greater risk. For that reason, international small caps are now trading on cheaper multiples than US large-caps and are well-placed to outperform in the short-medium term.
According to ETF provider BetaShares, the top inflows for January 2021 went as follows:
As a result, ETF provider VanEck has expanded its range of ETFs by announcing a new offering to join its suite. The VanEck Vectors MSCI International Small Companies Quality ETF (ASX:QSML) will join 28 of the issuer’s ETFs listed on the ASX.
QSML will take advantage of current investment and structural growth themes. VanEck says “QSML will offer investors exposure to a diversified portfolio of international developed-market small-cap quality growth companies with durable business models and sustainable competitive advantages. Many investors seek capital growth opportunities by investing in small companies such as those found in the S&P/ASX Small Ordinaries index.”
The VanEck fund is a lot more concentrated than the benchmark, the MSCI World ex-Australia Small Cap Index. QSML has roughly “150 international small companies selected by MSCI based on its quality factor, offering investors a portfolio of international small companies with strong balance sheets and stable earnings,” whereas the benchmark index has some 4,000 stocks.
The ETF’s holdings will be selected based on key fundamentals including (i) high return on equity, (ii) earnings stability and (iii) low financial leverage. QSML is in the final stages of regulatory approvals and is expected to commence trading on ASX in coming weeks.
