Small Caps, Big Possibilities With This Cheap Schwab ETF

Investors endure many preconceived notions, one of which is that international stocks are always more volatile than domestic equities. That's painting with broad strokes, particularly because it's a vast world outside the U.S.

Plus, that blanket statement doesn't account for differences across markets. It might surprise some market participants to learn that for the three years ended April 16, the MSCI EAFE index was slightly less volatile than the S&P 500 on an annualized basis, and the former's maximum drawdown over that period was 14.1%, or well below the 18.8% drawdown endured by the S&P 500.

International small caps are easy to access thanks to this Schwab ETF. Image source: Getty Images.

Unfortunately, old investment notions have a way of staying around. Hence, it's not a stretch to say that many U.S. investors may be doubly worried about the turbulence factor in ex-U.S. small-cap stocks. Still, reality can differ, as highlighted by the Schwab International Small-Cap Equity ETF (NYSEMKT: SCHC). Over the past three years, this exchange-traded fund (ETF) delivered significantly less yearly volatility than the Russell 2000 and the S&P SmallCap600 indexes, and that's only the start of its appeal.

Don't sleep on SCHC

As is often the case with domestic mid-cap stocks, smaller international names don't always get the fanfare they deserve. However, this Schwab ETF, which tracks the FTSE Developed Small Cap ex US Liquid index, turned 16 years old in January and has $5.57 billion in assets under management, confirming it's seasoned and well established.

It's easy to understand why savvy investors are embracing this ETF. International small caps have long-term track records of delivering better risk-adjusted returns than their large-cap counterparts. That might sound like an invitation to stock-pick, but remember: ex-US small stocks usually aren't widely followed by Wall Street, meaning there's not always sell-side guidance for investors to latch on to. The Schwab ETF does the heavy lifting for investors because it's home to 2,262 stocks. No need to stock-pick here.

Another perk of this ETF is that, while it's not a dedicated value fund, international small caps offer more value than their U.S. counterparts. "Perk" may be underselling that state of affairs because profitability levels are higher with developed market small caps than what's found in the Russell 2000. Said differently, the Schwab ETF offers more quality than a domestically focused equivalent.

International small caps also offer diversification. It's not just about exposure to a corner of the market that isn't domestic large caps. What's more important is allocating to stocks that don't move in lockstep with the S&P 500. That's how diversification is achieved and how investors round out their portfolios. The Schwab ETF checks that box.

Details matter

Diligent investors want to know which sectors and industries have the potential to spark smaller stocks outside the U.S. Some experts believe the answer includes industrial and financial services names, particularly in Europe. That could be a plus for this Schwab ETF, as it allocates 34% of its portfolio to those sectors.

For market participants who haven't yet had their investing passports stamped by foreign small caps, it's worth noting that, as is the case with smaller domestic companies, long-term approaches can deliver the biggest rewards. The Schwab fund makes buy-and-hold investing easy because it charges just 0.08% per year, or $8 on a $10,000 position.

Todd Shriber has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.