There are some corners of global equity markets that toil in relative anonymity. They are often overlooked by investors. That’s often said of midcaps in the U. S. Outside this country, small-cap stocks receive scant attention relative to large-caps.
In other words, many investors in this country aren’t examining ETFs such as the Invesco FTSE RAFI Developed Markets ex-U. S. Small-Mid ETF (PDN). They might want to consider altering their perspectives, because the Invesco fund is on fire this year. It’s up 33. 8% year-to-date, representing outperformance of the Russell 2000 Index of almost 3-to-1. Add to that, PDN’s annualized volatility is far below that of the domestic small-cap gauge.
PDN, which turned 19 years old in September, follows the RAFI Fundamental Select Developed ex US 1500 Index. It’s weighting methodology is unique in that it emphasizes fundamental factors such as book value, cash flow, sales and dividends over sheer market capitalization. That could be a winning recipe at a time when some analysts are increasingly bullish on ex-U. S. small-caps.
PDN Could Extend Its Potency
Bank of America recently started coverage of a batch of international small-cap ETFs, including PDN. It cited an array of positive factors.
“We initiate coverage of international small-cap stock ETFs with a favorable view given strong returns, attractive industry and country tilts, discounted valuations, and diversification benefits vs. US equities,” noted the bank.
Confirming the overlooked status of international smaller stocks, Bank of America pointed out that equities in that camp often aren’t as widely tracked by analysts and professional investors as are large-cap peers. That could be indicative of opportunity with PDN. That's because overlooked/undercovered stocks often notch big gains.
The Invesco ETF has another point in its favor. It allocates more than 30% of its weight to Japanese small-caps. That’s more than triple its second-largest country exposure. That's relevant because Bank of America said ex-U. S. small-cap ETFs with large Japan weights are preferable to rival products that lean more heavily into European small-caps. Of PDN’s top five country weights, only the U. K. is a European economy. Adding to the case for PDN is obvious value among ex-U. S. smaller stocks.
“International US small caps are cheap, with forward P/E for the MSCI World Ex-US Small Cap Value index at 12. 4x, slightly below its historical average of 13. However, as US large cap growth valuations have remained elevated at a P/E of 27, international small caps present an even more attractive opportunity from a valuation perspective as multiples remain below even international large caps, sitting at ~15. 5x,” added Bank of America.
PDN Has Diversification Credibility
Another reason PDN could be attractive to advisors and investors in 2026 is the point that ex-US small-caps are credible diversification tools.
“Compared to the S&P 500, international small cap funds have greater allocations to real asset-exposed sectors like industrials (15% overweight), materials (11%), and real estate (6%), with less invested in tech and communications,” observes Bank of America.
This ETF also has an enviable track record as it has quietly outperformed, by wide margins at that, the Russell 2000 and S&P SmallCap 600 indexes over the past three years while displaying significantly less annualized volatility over that span.
