This Dirt-Cheap ETF Covers Small-Cap Stocks From Both Developed and Emerging Markets. Here Is Why That Combination Could Be One of the Best Long-Term Diversifiers Right Now

Small-cap stocks are trading at extremely cheap valuations relative to their large-cap counterparts right now. International stocks are trading at a discount relative to U.S.-listed stocks.

The Vanguard FTSE All-World ex-U.S. Small-Cap Index ETF (NYSEMKT: VSS) allows you to capitalize on both attractive stock market categories. As the name suggests, this ETF invests in small-cap stocks, with exposure to international companies.

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This ETF could be an excellent addition for patient, long-term investors, and in this article, we'll take a closer look at its investment portfolio and the important information investors should know.

What the Vanguard All-World ex-U.S. Small-Cap Index ETF owns

While the ETF's official name is certainly a mouthful, the short description is that it is an international small-cap ETF. This means it invests in smaller companies (average market cap of $2.1 billion) located outside the United States, or internationally. It's worth clarifying that a global ETF (which this is not) invests in both domestic and international stocks, whereas an international ETF invests only in non-U.S. companies.

In all, the ETF owns about 4,950 small-cap stocks. Only about 11% of the portfolio is based in North America (mostly Canada), with the rest comprised of international stocks. 33% of the companies are European, 27% are located in developed countries in the Asia-Pacific region, and 28% are in emerging markets. This ETF is highly geographically diverse.

It's also important to mention that, unlike many index funds, the Vanguard All-World ex-U.S. Small Cap ETF doesn't have large positions in any particular stocks. In fact, no individual stock in the portfolio makes up 0.23% of the ETF's total assets. Compare this with the S&P 500, where 38% of the fund's assets are concentrated in just 10 of the holdings.

A cheap way to buy cheap stocks

Vanguard ETFs are known for their low investment expenses, and this one is no exception. The Vanguard FTSE All-World ex-U.S. Small-Cap ETF has a 0.06% expense ratio, which means that for every $10,000 in assets, your annual investment fees will be just $6. To be clear, this isn't a fee you have to pay -- it will simply be reflected in the ETF's performance over time.

This ETF can be a great way to get broad exposure to international small-cap stocks, especially at its current price. The average stock in the portfolio trades for just 1.6 times book value -- significantly less than the 2.1x price-to-book ratio of the domestic Russell 2000 small-cap index, and far below the 4.8 average P/B of the large-cap S&P 500 index.

Matt Frankel, CFP has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard FTSE All-World ex-US Small-Cap ETF. The Motley Fool has a disclosure policy.