3 Small-Cap ETFs to Buy Before the Great Rotation Leaves Large Caps Behind - 24/7 Wall St.[S&P 5006,854.30 -0.61%][Dow Jones48,873.00 -0.93%][Nasdaq 10024,853.10 -0.57%][Russell 20002,620.27 -1.74%][FTSE 10010,886.60 +0.28%][Nikkei 22558,618.70 -0.04%][Live Nasdaq Composite: Markets in Freefall on Tech, Economy Jitters][Investing]# 3 Small-Cap ETFs to Buy Before the Great Rotation Leaves Large Caps Behind### Quick ReadEarnings growth is broadening beyond the Magnificent Seven. Falling interest rates benefit ...

Core Viewpoint - International stocks are experiencing a resurgence, with ETFs like the iShares Core MSCI Total International Stock ETF (IXUS) outperforming the S&P 500, indicating a potential shift in investment focus for 2026 [1][2]. Group 1: Performance of International Stocks - In 2025, international stocks outperformed domestic stocks for the first time in a long period, with many ex-U.S. ETFs significantly beating the S&P 500 [1]. - The iShares Core MSCI Total International Stock ETF (IXUS) has increased by 7.5% year to date, while the S&P 500 has only gained 1.9% [1]. Group 2: Small Cap Stocks - The resurgence of international stocks includes smaller stocks, with the Avantis International Small Cap Value ETF (AVDV) being highlighted as a top choice for 2026 [2]. - The Avantis ETF has outperformed U.S. small-cap value indices over the past five years, indicating its effectiveness in the small-cap space [3]. Group 3: Fund Characteristics - The Avantis International Small Cap Value ETF is actively managed, which is advantageous in the less efficient small-cap market, particularly for international stocks that receive less attention from U.S. investors [4]. - The fund has a significant geographic allocation, with 32% of its portfolio in Japanese small caps, which are viewed as undervalued and potentially benefiting from Japan's economic policies [5]. - The Avantis ETF has a total asset size of $17 billion and an annual expense ratio of 0.36%, making it a cost-effective option for investors [6].

Investors are clamoring for foreign equities investments. Foreign equities ETFs performed very well in 2025, and many market outlooks see potential for strong repeat performance in 2026. It may not be straightforward, however, especially for simple, passive, market cap-weighted foreign equities ETFs. By adding one particular wrinkle, certain foreign equities ETFs may be able to provide that stellar foreign equities performance investors are looking for. See more: 3 Stocks Driving Emerging Markets ETF AVXC's ...

Core Insights - The article emphasizes the importance of understanding market trends over various time frames, including short-term (1 year), medium-term (5 years), and long-term (20 years) to derive valuable lessons from market behavior [1] - It highlights the challenge of staying invested in a systematic portfolio strategy, particularly when market conditions appear unfavorable [4][20] - The article warns against common cognitive biases such as recency bias and sunk cost fallacy that can mislead investors [3] Investment Strategy - Advising clients in wealth management involves imparting timeless lessons that can be applied consistently over time [2] - Investors often focus on recent performance data, which can lead to misguided investment decisions, neglecting the potential volatility and challenges of the investment journey [5][6] - The performance comparison between the S&P 500 ETF (SPY) and the Avantis International Small Cap Value ETF (AVDV) illustrates the importance of understanding different investment strategies and their long-term potential [7][10] Performance Analysis - Over a 5-year period, the cumulative performance difference between SPY and AVDV was 28%, equating to an annualized difference of 5% [10] - The article discusses the psychological challenges investors face when their investments underperform compared to benchmarks, leading to potential premature selling [11][15] - AVDV's performance since inception in 2020 shows that systematic strategies can yield significant returns despite initial underperformance [16][20] Market Behavior - The article notes that sectors and strategies can have vastly different paths to similar long-term returns, emphasizing the need for patience and a long-term perspective [25] - Investors must mentally prepare for periods of underperformance and the psychological toll it can take on their investment decisions [22][25] - The discussion on sector performance, particularly in materials and technology, highlights how market perceptions can shift over time, affecting investment strategies [19]

Core Viewpoint - The discussion centers around the performance of foreign equities in 2026, with contrasting views on whether they can replicate the strong returns seen in 2025. One analyst expresses skepticism about the sustainability of last year's gains, while the other remains optimistic about continued favorable conditions for international strategies [1][7]. Performance Metrics - The S&P World ex-U.S. Index achieved a 34.5% return as of January 9, 2026. Notable ETFs included the KraneShares Emerging Markets Consumer Technology Index ETF (KEMQ) with a 56.2% return, the Avantis International Small Cap Value ETF (AVDV) at 49.4%, and the VanEck Africa Index (AFK) with a remarkable 74.7% return in 2025 [3][4]. Market Conditions - The uncertainty surrounding the U.S. economy continues to drive investor interest in foreign equities. The U.S. job market showed weak performance, adding only 50,000 jobs in December 2025, which was below expectations and marked the lowest job growth in five years [9][10]. - Geopolitical risks are highlighted as a significant concern for foreign equities in 2026, with potential conflicts in regions like Venezuela and Ukraine posing threats to market stability [23][25][26]. Investment Opportunities - Diversification through international markets is emphasized, with both developed and emerging markets presenting strong opportunities. Investing in a mix of these markets can enhance portfolio diversification [11][19]. - The American Century Quality Diversified International ETF (QINT) is noted for its strategy of investing in large- and mid-cap stocks outside the U.S. with strong fundamentals, achieving a 38.02% return year-to-date as of December 31, 2025 [22][21]. Sector Analysis - The discussion includes a focus on sectors such as precious metals and technology, with a cautionary note on the sustainability of returns from mining-focused ETFs. The potential for growth in AI and defense sectors is also mentioned, driven by increased spending commitments from NATO members [12][18][17]. Regional Insights - Analysts express concerns about Europe's growth potential, citing slower earnings growth and structural challenges. The outlook for Asia, particularly India, is also cautious, with projections indicating a slowdown compared to 2025 [14][15]. - China's market is highlighted for its resilience and potential growth opportunities, particularly in the tech sector, with expectations for a new five-year plan to stimulate the economy [32][33].

Core Insights - International equities performed strongly last year, driven by foreign firms across various regions, but replicating this success may be challenging for investors [1] - Small-cap international equities, such as those offered by the Avantis International Small Cap Equity ETF (AVDS), present opportunities for greater upside and growth potential [1][4] Performance Comparison - AVDS significantly outperformed the S&P 500, returning 47.4% compared to the S&P 500's 21.2% over the past year [2] - AVDS also surpassed other international equities strategies, including the WisdomTree True Developed International Fund (DOL), which returned 42.5% [2] Investment Strategy - The Avantis International Small Cap Value ETF (AVDV) focuses on value-oriented small-cap firms and has attracted over $5 billion in investments while delivering a return of 58.8% [3] - Smaller firms are believed to offer greater growth potential, especially when selected through fundamental analysis, which may enhance their resilience during uncertain times [4]

Core Insights - Avantis Investors combines active and passive investing strategies to enhance portfolio performance, particularly through its "Systematic Active" approach in equities and fixed income ETFs [1] - The firm has surpassed $100 billion in total fund assets under management (AUM) since its inception in 2019, focusing on cost-conscious investment strategies while leveraging active management for customized asset allocations [2] Performance Highlights - The Avantis International Small Cap Value ETF (AVDV) has achieved a year-to-date return of 49.2%, significantly outperforming its category average across various time frames [4] - AVDV charges a fee of 36 basis points and aims to combine the benefits of indexing, such as transparency and diversification, with active management's value-driven decision-making [3] Investment Strategy - AVDV's strong performance is attributed to its focus on mining and metals firms, with no single sector exceeding 17% of the portfolio as of December 23rd [5] - The ETF is positioned as a strong long-term hold for investors seeking exposure to foreign equities, effectively integrating both active and passive investment strategies [5]

Core Insights - The international ETF space has shown strong performance in 2025, with a focus on the Avantis International Small Cap Value ETF (AVDV) as a notable investment option [1][2] - AVDV has achieved a year-to-date return of 47%, significantly outperforming its ETF Database Category average of 33.1% [1][2] - The fund's strategy combines active fundamental research with passive investment benefits, emphasizing flexibility and low costs [1][3] Performance Metrics - AVDV has consistently outperformed its category average over various time frames, including three- and five-year periods [2] - The fund's performance has been bolstered by its focus on small-cap value companies, which may thrive amid geopolitical and economic uncertainties [4] Investment Strategy - The management of AVDV employs fundamental criteria to identify highly profitable value firms, focusing on metrics such as shares outstanding, cash flow, revenue, expenses, and price-to-book value [3] - The appeal of international equities lies in their potential for diversification away from domestic U.S. uncertainties, making AVDV a compelling option for investors as the new year approaches [5]

Core Insights - 2025 has been a strong year for foreign equities, prompting market watchers to shift from underweight to neutral or overweight positions [1] - The Avantis International Small Cap Value ETF (AVDV) has achieved a 45% return YTD, ranking third among global, ex-U.S. ETFs with over $100 million in AUM [2] - AVDV has added over $5 billion in the last 12 months, increasing its AUM to $14.5 billion [2] Investment Strategy - AVDV employs a strategy that combines indexing strengths with active flexibility, focusing on small-cap value firms outside the U.S. [3] - The fund utilizes fundamental criteria such as cash flow, revenue, shares outstanding, and price-to-book value to evaluate potential investments [4] Performance Highlights - Notable investments include Perseus Mining Ltd. and Regis Resources Ltd., which have returned 122% and 220% YTD, respectively, benefiting from a strong mining sector [5] - AVDV is expected to maintain its appeal in 2026 due to domestic uncertainty in the U.S., growing gold demand, and a declining U.S. dollar [6]

Core Viewpoint - GMO warns that the AI sector resembles a classic investment bubble characterized by high valuations and rampant speculation [1][2] Group 1: AI Bubble Concerns - GMO has consistently cautioned about an AI bubble, reiterating its bearish stance as market exuberance grows [1] - Quantum computing stocks have surged over 1200% in the past year, leading to valuations that appear excessive [2] - The current market environment is compared to the dot-com bubble of 2000, suggesting potential risks for investors [3] Group 2: Investment Opportunities - GMO identifies attractive investment opportunities in developed market value stocks and non-US small-cap value stocks, especially in Japan [4] - Investors can shift their portfolios away from the AI sector without sacrificing long-term expected returns, as other risk assets are trading at fair valuations [6] - Funds such as the Avantis International Small Cap Value ETF (AVDV) and the iShares MSCI Intl Value Factor ETF (IVLU) provide exposure to these alternative investments [6]