Forget Owning Only U.S. Stocks. Foreign Small-Cap Value Beat the S&P by 5.7% in 2026

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Investors holding Vanguard FTSE Developed Markets ETF (NYSEARCA:VEA) own one of the cleanest, cheapest ways to gain exposure to developed markets outside the United States. VEA tracks a broad cap-weighted basket of Europe, Japan, Australia, and Canada at a net expense ratio of 0.03% as of April 4, 2026, which is roughly free. That tiny fee, combined with thousands of large and mid-cap names, is why VEA sits in so many three-fund portfolios as the non-US sleeve. The case for owning it is real. The case for owning it alone, in a year when international leadership has come from a corner that VEA barely touches, is weaker.

That corner is foreign developed small-cap value, and the cleanest single-ticker way to capture it has been the Avantis International Small Cap Value ETF (NYSEARCA:AVDV).

Where the cap-weighted approach leaves money on the table

The structure does exactly what a cap-weighted index is built to do. Roughly two-thirds of the portfolio is allocated to the largest non-US companies, with only a thin slice in small caps or deep-value names. That setup works when international large caps lead. In 2026, leadership has tilted smaller and cheaper. Through June 16, the return lands at 15.96% year-to-date, ahead of the SPDR S&P 500 ETF’s 10.69% gain over the same period. AVDV pushed a bit further, returning 16.38% YTD and widening the edge over the S&P 500.

The headline gap relative to VEA is modest YTD, but it widens sharply over longer windows. Over the trailing year, AVDV is up 43.83%, compared with VEA at 32.96% and SPY at 26.44%. Over five years, AVDV’s 92.60% beats VEA’s 58.90%. That is the small-cap and value premium showing up where academic research said it would: outside the United States, in the part of the market that cap-weighted indexes underweight, the same dynamic that underpins international factor spreads and size and value premiums.

What AVDV actually does differently

AVDV is an actively managed ETF that screens developed ex-US small caps for valuation and profitability, then weights toward names that score well on both. The tilt is the point: the screen favors cheap small caps that also show real earnings.

Morningstar’s 2026 outlook flagged this same logic, noting that the Morningstar Global Markets ex-US Index outperformed the Morningstar US Market Index by 10.6% in US-dollar terms through October 31, 2025, and that within developed markets, the UK and continental Europe still trade at reasonable valuations. Vanguard Investment Strategy Group put non-US developed markets equities third on its five- to ten-year risk-return ranking, behind only high-quality US fixed income and US value.

The tradeoffs are real

How the two can sit together

One approach VEA holders have used is to carve out a slice of the international allocation, say 20% to 40% of it, and route that into AVDV to add the small-cap value tilt the cap-weighted fund does not deliver. In a taxable account, selling VEA shares held at a gain triggers a tax bill, so directing new contributions and dividend reinvestments toward AVDV is one way investors have avoided realizing gains on a full swap. In a tax-advantaged account, the rebalance is mechanical.

What would change the call

The case for adding AVDV alongside VEA rests on two things: that internationally developed equities keep narrowing the valuation gap with the US, and that the small-cap value premium remains intact. If the dollar rebounds sharply or US large-cap earnings reaccelerate while international growth stalls, the YTD gap will close quickly. For investors whose international sleeve is one ticker deep, the relevant question is whether owning only the cap-weighted index leaves a known, documented premium on the table.

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