The Case for Adding International Small-Caps

International equities have demonstrated strong performance in 2025, with international small-cap value stocks identified as a compelling opportunity for continued upside into 2026 due to their relative cheapness and favorable interest rate environments abroad. The Avantis International Small Cap Value ETF (AVDV) exemplifies this trend, delivering a 39% YTD return by actively investing in fundamentally sound companies across markets like Japan, Canada, and the UK, offering diversification amidst U.S. economic uncertainty.

Analysis

The primary equity trend in 2025 has been the strong performance of international stocks, as investors who entered the year underweight this asset class have rotated capital abroad, driven by concerns over U.S. tariffs and more attractive foreign valuations. Within this theme, international small-caps are identified as a segment with continued upside, owing to their relative cheapness and the favorable interest rate environments in key overseas markets. For example, small-caps in low-rate jurisdictions like Japan benefit from cheaper borrowing costs for growth initiatives, a distinct advantage compared to the U.S. market which, despite falling rates, faces looming stagflation and tariff uncertainty. The Avantis International Small Cap Value ETF (AVDV) is highlighted as a prime vehicle to access this theme, utilizing an active, fundamentals-based strategy focusing on metrics like cash flow and price-to-book value. The fund's efficacy is demonstrated by its robust 39% year-to-date return, which has outperformed its ETF Database Category and FactSet Segment averages over the last one-month, three-month, and year-to-date periods, for a management fee of 36 basis points.

Key Decisions for Investors

• Investors underweight non-U.S. equities should consider a tactical overweight to the international small-cap value factor to capture potential continued outperformance driven by attractive valuations and favorable interest rate differentials.
• The Avantis International Small Cap Value ETF (AVDV) warrants evaluation as a core holding for this exposure, given its quantified 39% year-to-date return and active strategy designed to diversify portfolios away from U.S. economic uncertainty.
• It is prudent to monitor the monetary policies of central banks in AVDV's key markets, particularly Japan, as a shift away from low interest rates could alter the borrowing cost advantage currently benefiting the underlying small-cap holdings.