What is GWX? (Pros, Cons, and Strategies)

If you're keen on diversifying your investment portfolio internationally, the SPDR S&P International Small Cap ETF (GWX) is worth considering. By adding international small-cap exposure, GWX can help potentially enhance returns and reduce overall portfolio risk. In this blog post, we'll delve into what GWX is, its distinguishing features, advantages, and disadvantages. Stick around for some practical strategies on how to integrate GWX into your investment plan.

What is GWX?

GWX is an exchange-traded fund (ETF) that aims to track the performance of the S&P Developed Ex-U.S. Under USD2 Billion Index. This index includes stocks of companies that have small market capitalizations and are from developed markets outside the United States.

Unlike large-cap ETFs that focus on well-established companies, small-cap ETFs like GWX invest in smaller, yet potentially high-growth companies. This inherently carries a different risk-reward profile that can complement a diversified investment strategy.

Key Features of GWX

• Companies with small market capitalizations, specifically under USD 2 billion
• Stocks from developed international markets, excluding the U.S.
• Diversification across various sectors and geographic regions

After the initial selection, the ETF tracks the performance of its index, providing broad exposure to international small-cap stocks.

GWX Composition

GWX includes a mix of companies from diverse developed markets, such as Japan, the United Kingdom, Canada, and several countries across Europe and the Asia-Pacific region. The sectors represented range from industrials, consumer discretionary, and financials to technology and more. This wide scope ensures that investors are not overly concentrated in any single market or industry.

Pros of GWX

Enhanced Diversification

One of the most compelling reasons to invest in GWX is enhanced diversification. By including small-cap stocks from various developed markets, GWX helps reduce the portfolio’s reliance on the U.S. market. This diverse spread can balance out the impacts of regional economic downturns and provide smoother overall returns.

Growth Potential

Small-cap stocks generally have greater growth potential compared to large-cap stocks. While they are more volatile, they can also provide higher returns. By investing in international small-cap stocks, GWX opens up a realm of growth opportunities that aren’t accessible through large-cap or domestic ETFs.

Currency and Market Exposure

Another advantage of GWX is its exposure to various currencies and international markets. This can be particularly beneficial in cases where the U.S. dollar depreciates or when certain foreign markets perform well.

Cons of GWX

Higher Volatility

The first drawback is the inherent higher volatility associated with small-cap stocks. They tend to be more sensitive to market changes compared to large-cap stocks, making them riskier. The same principle extends to international small-cap stocks, which also carry foreign market volatility risks.

Less Liquidity

Small-cap stocks usually have lower trading volumes compared to large-caps. This can result in less liquidity and wider bid-ask spreads, making transactions costlier and potentially affecting the ETF’s overall performance.

Currency Risks

While diversifying internationally offers benefits, it also introduces currency risks. Fluctuating exchange rates can affect the returns of the ETF, adding an additional layer of complexity for investors.

GWX Investment Strategies

Investing in GWX requires a balanced approach to harness its benefits fully while managing the associated risks. Below are some strategies to consider:

Long-term Growth Strategy

Given its higher volatility, GWX is more suitable for investors with a long-term horizon. Holding onto GWX for an extended period can potentially smooth out short-term volatility and capitalize on the long-term growth potential of international small-cap stocks.

Dollar-Cost Averaging

To cope with the volatility, consider a dollar-cost averaging strategy. This involves investing a fixed amount in GWX at regular intervals. This approach can help mitigate the impact of market fluctuations by spreading your investment over time.

Complementary Investment

GWX can serve as a good complement to a portfolio already heavy in large-cap U.S. stocks or bonds. By integrating GWX, you can add a layer of international small-cap exposure, potentially enhancing your overall portfolio returns while providing additional diversification.

Hedging Currency Risks

Given the currency risks associated with international investments, you may consider hedging strategies to mitigate currency exposure. Some investors use currency-hedged ETFs or futures contracts to offset foreign exchange risks.

Conclusion

GWX offers a unique investment opportunity by providing exposure to international small-cap stocks, offering diversification and growth potential. While it comes with its set of risks, particularly higher volatility and currency risks, strategic long-term investment approaches like dollar-cost averaging and complementary portfolio integration can help manage these challenges.

With a thoughtful approach, GWX can be a valuable component of a well-diversified portfolio, particularly for those looking to tap into the growth potential of smaller international companies.