An Unexpected Strength Of Small Cap ETFs

Small-capitalization stock exchange traded funds that follow a dividend theme may have a greater value tilt, providing relatively cheaper valuations compared to the broader market.

For instance, the WisdomTree SmallCap Dividend Fund (NYSEArca: DES) offers investors exposure to small-cap dividend growth. DES tracks the WisdomTree SmallCap Dividend Index, which is comprised of small-capitalization stocks weighted by cash dividends each component company is projected to pay in the coming year.

The appreciating U.S. dollar is taking its toll on larger companies’ revenue with significant overseas exposure. On the other hand, mid- and small-cap exchange traded funds track companies that expand with the growing U.S. economy. 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 annualized volatility on DES was materially higher at 27% compared to 21.1% for SPY, and during the market crash, the shares had a max drawdown of 65.6%, which is fairly massive. Since then, the ETF has not been able to catch up with SPY, which may largely be a function of how severe the losses were during the downturn,” according to a Seeking Alpha analysis of DES.

Importantly, small-cap ETFs are becoming credible sources of dividend growth.