International equities were a very strong segment for investors last year. Foreign firms in Europe, Asia, South America and Africa helped lift portfolios for investors. Repeating that strong performance this year may be tough, but investors have options. By leaning into small-cap offerings within international equities strategies, investors and advisors can get exposure to firms with potentially greater upside and growth potential.
Consider, for example, the Avantis International Small Cap Equity ETF (AVDS). AVDS invests in small-cap firms within the international equities space. The strategy, poised to hit its important three year milestone this July, charges a 30 basis point (bps) fee for its approach. The fund targets ex-U.S. small caps with its active approach, emphasizing profitability and certain value characteristics. Its managers scrutinize potential investments based on metrics like book value, cash flow, and shares outstanding.
That approach helped AVDS outperform the S&P 500 by quite a lot last year. Using the SPDR S&P 500 ETF Trust (SPY) as a stand in, AVDS outperformed SPY over one year, 47.4% to 21.2% in that time according to YCharts data. What’s more, AVDS also outperformed “all cap” international equities strategies like the WisdomTree True Developed International Fund (DOL), which returned 42.5% in the same time.
A Small Cap Spin on International Equities
One can find even “stronger” returns in small cap international equities by adding an additional style view therein. The Avantis International Small Cap Value ETF (AVDV) charges 36 bps for its approach, similar to AVDS but with a greater value focus. AVDV has not only pulled in more than $5 billion in the last year, it has also returned a robust 58.8% per ETF Database data.
Why, then, should investors look to small caps as a way to repeat last year’s strong foreign equities performance? Smaller firms can offer greater growth to investors, and when identified via a fundamental screen, those companies may have the cash flow and durability to take advantage of uncertain times. A small cap lean also helps managers focus on just one segment in a big world of international equities. Looking ahead, AVDS and AVDV, then, may appeal.
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