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09/10/2010 11:37 am EST

Focus: ETFS

Jack Ablin

CIO, Cresset Wealth Advisors

International small-cap stocks are significantly undervalued, says Jack Ablin, chief investment officer for Harris Private Bank, and he recommends two specific ETFs to play the trend in an interview with Howard Gold, executive editor for

Howard Gold: Well, Jack, you strike me as kind of a glass is half full kind of guy most of the time. Even though you have no illusions and think we are in a troubled economy and a difficult market, you think there are opportunities for people.

Jack Ablin: I think there are. I mean, given, what I like to do is essentially treat managing money and dealing with the market like playing cards. I don't control how the cards are dealt. I have my hand, and then how do I play it. And given this environment, what we find is that we've got correlations moving to all time highs. 

Q: That means all these different asset classes that usually move opposite to each other now move together. 

A: Right. So diversification isn't quite as effective as a risk modification tool as it has been. But if all markets are moving together, well, let's just buy the cheapest market. They are all going to move together anyway, so let's find where we have the most downside protection, and right now I find the cheapest major market is international small caps. EFA small cap is the index. 

Q: So that's across the board developed and emerging markets, not...

A: No it's developed markets so it would be the small companies within those spaces. Now clearly with the troubles in Europe and some of the other places.

A: Like Japan.

A: Yeah, these small companies, which generally operate domestically, have gotten hurt. They're trading currently at a price-to-sales ratio of 0.4.

Q: Ben Graham would buy them at that price.

A: That's it, and to put it into context, the S&P 500, which many people argue is pretty cheap, is trading at a 1.1 to 1.2 price-to-sales ratio. I like it at 1.0 but even at 1.1 or 1.2 most people would jump in. That argues that international small caps could triple and still be fairly valued relative to the US. Now, they're always going to trade at some discount, at least over time, but I wouldn't mind if it doubled. 

Q: So, can you give us a couple of ETFs that do specialize in international small caps?

A: Sure, there are two ETFs that I can think of off the top of my head: SPDR S&P International Small Cap ETF (NYSEArca: GWX) is a broad basket of international small caps and WisdomTree International SmallCap Dividend Fund (NYSEArca: DLS) is a WisdomTree Fund-not quite as keen on the latter, but it is also another way to get international small cap exposure.

Q: Now do you own either of these funds personally or professionally?

A: Absolutely.

Q: Thank you
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