Much has been made of the recent divergence of U.S. small-caps from their large-cap counterparts.
It is easy to see why. Over the past three months, the iShares Russell 2000 ETF (NYSEArca: IWM), the biggest small-cap ETF by assets, is down 3.9% while the S&P 500 is up nearly 3%. The small-cap retrenchment has plenty of market observers calling for broader market weakness, but dividend-paying small-caps have proven less bad than their no dividend or low-yield equivalents. [Small-Cap ETF Riddle]
“The S&P 600 has a free-cash-flow yield of 4.5%, while one fund tracking the Russell 2000 has a free-cash-flow yield of 3.4%,” reports Alexandra Scaggs for Barron’s.
The S&P 600 can be accessed via the iShares Core S&P Small-Cap ETF (NYSEArca: IJR) and the SPDR S&P 600 Small Cap ETF (NYSEArca: SLY), both of which have modestly higher distribution yields than IWM. Perhaps, not coincidentally, IJR and SLY have outperformed IWM by an average of 200 basis points over the past 90 days.
The Russell 2000 Value Index yields 2.1%, according to Barron’s. That is the underlying index for the iShares Russell 2000 Value ETF (NYSEArca: IWN). IWN has a trailing 12-month yield of 1.85% compared to 1.3% on IWM, according to iShares data. Over the past 90 days, IWN is down just 0.88%.
Small-cap ETFs that are geared to be explicit dividend plays have also held up well compared to broader benchmarks of smaller stocks. For example, the $1 billion WisdomTree SmallCap Dividend Fund (NYSEArca: DES) is up 1% over the past three months. [Stick With Small-Caps With Dividend ETFs]
The nearly 680 companies in DES are pulled from the WisdomTree Dividend Index after the 300 largest market value firms are removed. The WisdomTree Dividend Index is the underlying index for the WisdomTree Total Dividend Fund (NYSEArca: DTD).
The WisdomTree SmallCap Dividend Index has a dividend yield of almost 3.3%. At a time when small-cap valuations are considered frothy, noteworthy is the 24.7 P/E ratio on DES, which while still above the S&P 500, is well below the P/E of almost 30 for IWM.
Focusing on dividends with small-caps does not mean investors have to sacrifice exposure to growth stocks. Just look at the WisdomTree U.S SmallCap Dividend Growth Fund (NasdaqGM: DGRS). The ten-month old DGRS is down just half a percent over the past 90 days.
DGRS tracks the WisdomTree U.S. SmallCap Dividend Growth Index, which yields 2.33%. The index is weighed by fundamental factors such as growth expectations, return on equity and return on assets, according to WisdomTree.
DGRS has a growth feel to it as consumer discretionary and technology names combine for 29% of the ETF’s weight. Like DES, DGRS pays a monthly dividend. DGRS is up 10.5% since its July 2013 debut, a performance that is superior to those offered by some more established small-cap ETFs over the same period. [Nifty New Dividend ETFs]
WisdomTree SmallCap Dividend Fund
Tom Lydon’s clients own shares of IWM.