Income is the story of the day—notably the lack of any reasonable levels of income from such traditional sources as bonds and money market investments.
This has caused many to search for income in a variety of asset classes; from large-cap, blue-chip dividend payers to real estate investment trusts (REITs) to preferred stocks to master limited partnerships (MLPs)—if it produces a good income stream, it has been in high demand in recent years.
There is a big part of the U.S. equity market that I believe has—to a significant extent—been glossed over and ignored in this hunt for income, and that is mid- and small-cap dividend payers in the United States.
The Forgotten Dividend Payers
While there are a large number of dividend-based exchange-traded funds (ETFs) that concentrate on the large-cap segment of the market, I believe there are only two indexes (and ETFs designed to track them) in the United States focused exclusively on stocks outside this size segment: the WisdomTree MidCap Dividend Index (with the WisdomTree MidCap Dividend Fund—DON—designed to track it) and the WisdomTree SmallCap Dividend Index (with the WisdomTree SmallCap Dividend Fund—DES—designed to track it).
Mid- and small-cap ETFs in general represent a very large category of traditional asset allocation models for U.S. equities and two of the biggest market segments within ETFs. There are almost $60 billion invested in small-capitalization ETFs and close to another $60 billion invested in mid-capitalization ETFs. Collectively, these two market segments represent over 20% of the approximately $514 billion invested in U.S.-based equities focused on broad market indexes.
Yet while U.S.-based dividend ETFs collectively represent almost $49 billion in assets, or about 9% of U.S. equity assets under management, there are less than $1 billion combined in the mid- and small-cap dividend category.
Based on the investable opportunity sets, I believe these mid- and small-cap dividend funds should be much larger. Consider this:
Market Capitalization as a Measure of Potential Opportunity
There are more than $10.5 billion invested in either ETFs or exchange-traded notes tracking the performance of the Alerian MLP Index, and more than $20 billion in ETFs designed to track the Dow Jones U.S. Real Estate Index and the MSCI U.S. REIT Index. Based on the aforementioned market capitalization statistics, I believe the biggest investment opportunity set by far exists in the ETFs that track the WisdomTree MidCap and SmallCap Dividend Indexes—and there is less than $1 billion invested in these funds.