It has been a fantastic year for U.S. small-caps, a fact highlighted by the 38.4% gain for the iShares Russell 2000 ETF (NYSEArca: IWM).

But with that price appreciation has come a trait often associated with soaring small-caps: High valuations. At the end of November, the Russell 2000 sported a P/E ratio of almost 33 and a price-to-book ratio of 2.3.

Investors looking for value among small-caps need to simply look across the Atlantic and with Europe showing signs of emerging from the clutches of its sovereign debt crisis and deep recession, small-caps could offer investors more leverage to that recovery.

The “European story’s about Europe. It’s about Europe coming from a recession to the acceleration of growth,” J.P. Morgan Asset Management’s Andres Garcia-Amaya told CNBC.

One way to access European small-caps is with the WisdomTree Europe SmallCap Dividend Fund (NYSEArca: DFE). Proving that U.S. small-caps were not the only game in town this year, DFE surged 44.7% this year and will likely finish as 2013’s best Europe ETF. [10 Best Global ETFs of 2013]

Although DFE is a small-cap play on region full of previously battered equity markets, traits that imply higher degrees of risk and volatility, the ETF’s country profile is somewhat conservative with the U.K., Sweden and Germany combining for 50% of the fund’s weight.

The WisdomTree Europe SmallCap Dividend Index has annualized volatility of 25.5% since its mid-2006 inception and a beta of almost 1.18 against the MSCI EAFE Index, according to WisdomTree data.

“Looking within the individual country markets we notice the United Kingdom and Germany leading the way with the lowest estimated P/E ratios—just above 13x earnings and about 10% lower than Europe’s valuation as a whole. Both countries being among the region’s top economies, it is interesting that they also have the lowest current valuations. If one looked for the highest discount to its historical median, France takes the second spot after the United Kingdom. France also happens to have the third-lowest estimated P/E ratio,” said WisdomTree Research Director Jeremy Schwartz in a note out earlier this month. [WisdomTree: Europe Trading at a Discount to Historical Averages]

Garcia-Amaya sees value in Southern Europe, noting that Spain is implementing reforms that may be painful up front, but could also prove beneficial down the road. Spain and Italy combine for about 16% of DFE’s weight.

Garcia-Amaya highlighted consumer and industrial names as offering opportunities. Industrials are DFE’s largest sector weight at 25.3% while discretionary checks in at 16%, the ETF’s third-largest sector weight.

WisdomTree Europe SmallCap Dividend Fund


Tom Lydon’s clients own shares of IWM.

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