• Small-cap stocks are more sensitive to a pickup in the local European economy than many exporters, which are more impacted by the global economy

• Small caps often have greater exposure to cyclical sectors such as Industrials and Consumer Discretionary and less exposure to defensive sectors such as health care, utilities and consumer staples

• As a result of the sector positioning, small caps often have higher betas and move more in sync with the market in both up and down environments.

While gains certainly were strong for European small caps in 2013, many believe the European economic recovery is just getting started. As far as the valuation of stocks in DFE, WisdomTree believes one of the most important focal points has to be on the relative value discipline built into the Index methodology.

The WisdomTree Europe SmallCap Dividend Index is rebalanced annually. In essence, the process takes a detailed look at the relationship between the dividend growth and price performance of European small-cap dividend-payers. Those that grew their dividends but whose prices may not have responded commensurately typically have the best chances of increasing in weight, whereas those whose prices performed very well but whose dividends did not grow commensurately typically have the best chances of decreasing in weight.

WisdomTree believes that taking the chips off the table at regular intervals after strong performance is critical to a strategy seeking to build a strong performance record over time. The rebalance that occurs this June will help re-anchor the constituent stocks back to a sense of relative value after such strong performance gains. We continue to believe European small caps should be considered part of an allocation to Europe’s budding recovery.

1Universe: Morningstar Europe Stock category of ETFs and open-end mutual funds based on the performance of each eligible competitor within this category with full performance from 12/31/2012 to 12/31/2013.
2Source: Morningstar Direct, as of 12/31/2013. Of all U.S.-listed ETFs in Morningstar’s Europe Stock category, DFE was the only one tracking the performance of an index focused purely on small-cap stocks.

Important Risks Related to this Article

There are risks associated with investing, including possible loss of principal. Foreign investing involves special risks, such as risk of loss from currency fluctuation or political or economic uncertainty. Funds focusing their investments on certain sectors and/or smaller companies increase their vulnerability to any single economic or regulatory development. This may result in greater share price volatility. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile.

Investments focused in Europe are increasing the impact of events and developments associated with the region, which can adversely affect performance.