Two diversifying asset classes have posted outsized returns in 2017. Foreign real estate and foreign small cap stocks have risen in the neighborhood of 20% in response to stronger economic growth overseas. U.S. small caps and U.S. real estate have posted modest results by comparison following a strong 2016.

Small caps and real estate tend to be sensitive to local economic conditions. As overseas economies have improved in 2017, stock prices have risen rapidly. Domestically-oriented U.S. assets such as real estate and small caps have lagged this year as hopes fade for economic stimulus from Washington.

Valuations suggest these markets have potential for further gains. Foreign small caps have a price to earnings ratio of 16, meaningfully below U.S. stock averages. Likewise, foreign real estate trades at a P/E of 11 versus 29 for domestic shares, according to S&P.

Overseas assets also offer attractive income. Foreign small caps and real estate yield 2.5% and 3.9%, respectively.

Having a broadly diversified portfolio often means owning ancillary asset classes that perform differently from other holdings. We continue to recommend foreign real estate and small caps for risk-tolerant investors, and favor these sectors versus U.S. real estate and small caps.