As the economy is in the slow process of showing signs of improvement, investor's appetite for risk is increasing as well. Commodities are coming into play with inflation fears. Even real estate is bouncing back; the Vanguard REIT Index ETF (NYSE: VNQ) is well off its 52-week low. This trend of risk taking has investors looking all over the spectrum of new securities and asset classes. One over-looked sector that investors miss in their diversification plan is in that of foreign small-cap stocks.

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Small Beats Large
In a study by economists Eugene Fama and Kenneth French, over a 50 year period from 1956 to 2005, small cap stocks have beaten large caps by nearly four percentage points annually. In their study they found that $10,000 invested in large cap stocks would be worth $5,169,064 over that time period; Small caps would be valued at $28,919,971. The long-term trends for the global economy have made it clear that strong companies can be found outside the United States. Combing small-cap stocks with international investing is a long-term recipe for success that investors can tap into using a host of various low-cost exchange traded products. (Find out why small companies have high potential for growth in our article Small Caps Boast Big Advantages.)

Broad-Based Choices
For most investors, a broad-based choice is best for their foreign small-cap exposure. There are two funds in this category that stand out. The oldest, WisdomTree International Small-Cap Dividend ETF (NYSE: DLS) follows small-capitalization stocks in the industrialized world outside the U.S. and Canada. Specifically, those of the dividend-paying companies. True to Wisdomtree's form, the ETF weights companies in the index based on annual cash dividends paid. Due to the dividend nature of the index, the fund focuses on value stocks. The ETF's holdings are broken up in a variety of sectors with industrials being the largest at 31%. The fund also has a 30% weighting towards Japan with the United Kingdom and Australia rounding out the top three. The fund currently yields 5.71% and charges 0.58% in expenses.

For growth-oriented investors, the State Street sponsored SPDR S&P International Small Cap (NYSE: GWX) offers a dynamic choice. The fund gives larger weightings towards consumer discretionary and technology sectors as well as more basic material names such as miner IAMGOLD Corp. (AMEX: IAG). The fund again lists Japan as its largest sector weighting at 35%. The SPDR also includes Canada, which is excluded from the WisdomTree fund. Expenses run 0.59% and the ETF yields 2.05% through semiannual payments.

Country Specific
By betting on single country small caps, investors can up their risk to reward quotient. Again, exchange-traded products make this possible. Two funds in this area bet on the emergence of the so called BRIC nations, in this case, China and Brazil.

As the largest country and economy in South America, and the tenth largest economy worldwide, Brazil is seen as achieving massive economic growth and prosperity over the next few decades. The Market Vectors Brazil Small-Cap ETF (AMEX: BRF) allows investors to harness the growth of the country's emerging businesses. Through the fund's 54 holdings, the ETF intends to cash in on the long-term trends of higher domestic consumption, infrastructure growth, and export commodity driven demand. The fund is up nearly 137% year-to-date.

In China, the sense of new entrepreneurialism is sweeping the populist. As the communist nation embraces more free market capitalism ideas, its small business environment will benefit. The Claymore/AlphaShares China Small Cap ETF (NYSE: HAO) is an easy way to participate in China's other economy, away from the state-owned enterprises (SOEs). The fund's 134 holdings allow investors to build on China's fastest expanding companies from the ground up. The fund charges 0.70% in expenses. (Learn about countries that transitioned from public enterprises to private in our article State-Run Economies: From Public To Private.)

Bottom Line
As investors begin to take on more risk and add to their investment pie, one area that is often looked is in foreign small caps. These companies can often be the keys to long-term economic and portfolio growth. When using ETFs, the task of adding these companies to an investment mix is quite simple. The preceding funds are a great way to do just that, either as single investment or in tandem.

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Tickers in this Article: DLS, HAO, BRF, GWX, IAG, VNQ

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