VSS: Why I Keeep Buying International Small Caps

The Vanguard FTSE All-World ex-US Small-Cap Index Fund ETF (VSS) has demonstrated significant recent outperformance, rallying 34% from its April low and being up 14 of the past 16 weeks, exceeding major indices. This ETF offers diversified exposure to international small- and mid-cap stocks, characterized by an attractive 13.2x P/E, a robust 16.6% long-term EPS growth rate, a low expense ratio, and a 2.8% yield. Despite short-term seasonal headwinds, the analyst maintains a buy rating, projecting strong long-term returns after a period of underperformance.

Analysis

The Vanguard FTSE All-World ex-US Small-Cap Index Fund ETF (VSS) is exhibiting significant positive momentum, having rallied 34% from its April low and posting gains in 14 of the last 16 weeks, outperforming major indices. This strong performance is supported by compelling fundamentals, including an attractive valuation with a 13.2x price-to-earnings ratio combined with a high 16.6% long-term earnings per share (EPS) growth rate. The vehicle's appeal is enhanced by a 2.8% dividend yield and a low expense ratio, making it suitable for total return strategies. This recent strength follows a multi-year period of underperformance, suggesting a potential major trend reversal for the asset class. While the analyst maintains a buy rating, they also acknowledge the existence of unspecified short-term seasonal headwinds, which introduces a note of caution. The analyst's disclosed beneficial long position in the ETF should also be considered when weighing the highly bullish opinion.

Key Decisions for Investors

• Given the strong momentum coupled with an attractive valuation (13.2x P/E) and high growth forecast (16.6% EPS), investors could consider VSS for tactical exposure to a potential recovery in international small-caps.
• It may be prudent to remain mindful of the noted 'short-term seasonal headwinds' and the rapid 34% rally from the lows, which could signal a near-term overbought condition.
• The fund's 2.8% yield and low expense ratio make it a strong candidate for long-term, total-return focused portfolios, but the bullish analyst's disclosed long position warrants consideration as a potential source of bias.