- WisdomTree MidCap Dividend Fund (NYSEArca: DON) increased 5.9% year-to-date, compared to the S&P 500 Index’s 0.4% return so far this year
- Since its inception through February 2016, DON returned 7.8%, compared to the 6.6% for the Mid Cap benchmark
- DON shows a 2.62% 12-month yield and a 0.38% expense ratio
Mid-sized value stocks have been outshining the broader market this year, and one exchange traded fund that tracks this segment has been a notable outperformer.
The WisdomTree MidCap Dividend Fund (NYSEArca: DON) increased 5.9% year-to-date, compared to the S&P 500 Index’s 0.4% return so far this year.
The fund has also outperformed the Russell Mid Cap Value Index. Since its inception through February 2016, DON returned 7.8%, compared to the 6.6% for the Mid Cap benchmark.
DON “is a good choice for exposure to dividend-paying U.S. mid-cap stocks,” according to Morningstar analyst Michael Rawson. “The fund’s strategy of weighting mid-cap stocks by dividends paid results in a mid-value tilt.”
Unlike other dividend-paying stock ETFs, DON weights components based on the total dollar amount of dividends paid as opposed to others that weight components based on yield percentage. The dividend weighting methodology “provides a less aggressive approach to dividend investing,” Rawson added.
The value tilt has also historically proven to provide a source of outperformance. Since 1927, mid-value stocks have outperformed the market by about 3 percentage points per year, according to data from the French Data LIbrary.
However, potential investors should be aware that DON’s tilt toward mid-cap and value stocks can be risky, so investors should be willing to withstand periods of underperformance, Rawson warned. Fewer mid-cap companies pay a dividend, compared to large-cap stocks, and some may be distressed or moribund. For instance, ONEOK (NYSE: OKE), one of DON’s largest components, saw share prices plunge 46% in 2015, along with other midstream energy companies.
“While it appears to offer an attractive yield, it’s reasonable to expect the dividend will be cut,” Rawson said. “Consequently, investors should not expect that this fund’s dividend will grow every year.”
Currently, dividend-paying stocks are back in style as the Federal Reserve maintains a low interest rate environment – the Fed now expects only two interest rate hikes this year, downwardly revised from an expected four hikes. However, when interest rates do begin to rise, dividend stocks may once again fall out of favor because they tend to be slower growing and earnings may not grow fast enough to offset the negative effects of rising rates relative to growth stocks.
DON’s sector allocations include financials 22.1%, consumer discretionary 19.4%, utilities 17.5%, industrials 15.2%, materials 7.7%, information technology 7.2%, energy 3.6%, consumer staples 3.3%, health care 2.0% and telecom 1.9%.
DON shows a 2.62% 12-month yield and a 0.38% expense ratio.
WisdomTree MidCap Dividend Fund