Small-Cap Royalty With This ETF

Some obvious trends are emerging in the exchange traded funds arena this year. First, despite disappointments dealt by developed markets such as Australia and Japan, not to mention the well-documented woes of emerging markets, investors have embraced Europe ETFs.

That applies to both diversified and single-country funds. The major single-country ETFs tracking the U.K., Italy and Spain have brought in a combined $1.2 billion while five of the six ETFs tracking Germany, the Eurozone’s lagest economy, are inflow positive since the start of the year. [Big Inflows to Europe ETFs]

Second, investors have warmed to European small-caps. The WisdomTree Europe SmallCap Dividend Fund (NYSEArca: DFE) proves as much. Not only was DFE the best non-leveraged Europe ETF last year, but just days ago it joined the $1 billion in assets club. [The Best Europe ETF]

A primary contributor to DFE’s success has been the U.K., which accounts for almost a quarter of the fund’s country weight. Investors can go “all in” on U.K. small caps with the iShares MSCI United Kingdom Small-Cap ETF (NYSEArca: EWUS).  Year-to-date, EWUS is up 3% compared to a 1% for the iShares MSCI United Kingdom ETF (NYSEArca: EWU).

“U.K. small caps have been consistently outperforming large caps, therefore they should be at least satellite positions of global or European portfolios. EWUS definitely delivers alpha vs. EWU,” said Bartlomiej Fraszczyk, portfolio manager at Generation Systematic Solutions, in an interview with ETF Trends.

U.K. small caps, including some of the 240 held by the $31.7 million EWUS, offer important advantages. First, these stocks are more domestically focused, offering investors  more leveraged to the improving U.K. economy than say the FTSE 100. That is an important factor when considering the U.K. economy is expected to grow 2.6% this year.

“Earnings at companies in the index of smaller stocks will jump to 278.4 pence a share this year from a loss of 137.6 pence in 2013, the average of analysts’ estimates compiled by Bloomberg shows. That compares with a 30 percent increase to 506.3 pence for the FTSE 100,” according to Bloomberg.