Why Europe’s Small Caps And ETFs Are Feeling Good

Compared to the larger firms in Europe, small- and medium-sized enterprises (SMEs), along with related exchange traded funds (ETFs), are faring much better than expected.

Europe’s SMEs, firms with less than 250 employees, represent a workforce of 88 million people and make up two-thirds of private-sector employment, according to the Economist.

SMEs have less assets, smaller retained earnings, fewer customers than large corporations, and they can’t spread risk by diversifying product lines or expanding to different locations. These small businesses are also experiencing dwindling demand and shortage of bank credit, but governments are starting to order banks to lend to them, provide credit guarantees, suspend some taxes and force public bodies to pay up faster.

In a recent survey, a little more than half of 804 French SMEs expect revenues to remain the same or increase in 2009.

German domestic consumption is keeping steady and it is helping to support home businesses while exporting firms are more troubled.

While in Britain, corporate liquidations increased to 4,941, up 56% year-over-year, in the first quarter and most of which were in SMEs. But a recent survey found 60% of businesses performing equivalent to or better than last year.

Small-caps in other countries aren’t that much different than they are in the United States, in that their small size makes them especially nimble and better able to adapt to changing conditions.

• SPDR S&P International Small Cap (GWX): up 10.4% year-to-date; Western Europe is 34.1%

• WisdomTree International SmallCap Div (DLS): up 7.9% year-to-date; Western Europe is 42.2%

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