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ETF Specialist

Do Foreign Small Caps Offer Better Diversification?

The advantage is marginal.

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One of the easiest ways for investors to diversify a portfolio of U.S. stocks is by allocating a portion of their assets to foreign stocks. When looking overseas, investors should note a key difference between large- and small-cap stocks that can potentially improve diversification.

Many foreign small-cap stocks often sell a majority of their goods and services into local markets. Consequently, their revenue streams are less diversified than many large-cap multinationals, which generate sales globally. But being more closely knit to local business conditions can cause foreign small caps to behave differently. Does the local focus of foreign small caps improve their ability to diversify a portfolio of U.S. stocks?

Daniel Sotiroff has a position in the following securities mentioned above: VEA. Find out about Morningstar’s editorial policies.