Why European Small-Cap ETFs Are Shining In Down Markets | ETF Trends

When an economy turns around, it is usually the small and nimble companies that are able to react first, and small-cap stocks, along with related exchange traded funds (ETFs), may act as an early indicator for the economy once again.

Smaller European companies shrank 6.8%, mid-sized companies diminished 8%, and big-caps dropped 12% on a year-to-date basis, reports Barbara Kollmeyer for MarketWatch. Now, investors face bargain prices in small-cap stocks with stocks trading around a 20% discount to European large*caps.

But small-cap performance has not inspired the hearts of investors as of late. Some look to large-caps with their abundant capital, cash flow, and resilience in downturns. Smaller companies tend to rely on the whims of banks and they have exposure to smaller European markets.

J.P. Morgan analysts continue to believe in positive returns on small- and mid-cap stocks this year, but they anticipate lower performance compared to large-caps during the recovery this time around.

While some see the benefits of large-caps, some think the smaller companies are at an advantage in specializing and providing for a niche market. Value in small caps of Europe can be seen as a result of cash flows out of international funds and in managers of small companies who keep good balance sheets.

  • There are small-cap stocks that are financially stable and are able to pay out dividends as a result of good business. WisdomTree Europe SmallCap Dividend (DFE): down 9.6% year-to-date; up 6.9% in the last month

ETF DFE performance

  • WisdomTree International SmallCap Div (DLS): down 11.3% year-to-date; up 11.2% in the last month

ETF DLS performance

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.