ETF Trends CEO Tom Lydon discussed the ProShares Russell 2000 Dividend Growers ETF (SMDV) on this week’s “ETF of the Week” podcast with Chuck Jaffe on the MoneyLife Show.
SMDV seeks investment results, before fees and expenses, that track the performance of the Russell 2000 Dividend Growth Index.
Jaffe finds this pick interesting, as small caps haven’t been setting the world on fire, as of late. However, when questioning whether this is a value play or a 200-day moving average play, to go along with the dividend growth this ETF inspires, Lydon has several reasons for why this pick is worthwhile.
As Lydon explains, the past 10 years have had plenty of focus on large cap versus small cap and growth versus value. Recently, small cap stocks have started to outperform large caps stocks, and there’s been a shift between value and growth, with value now being the least expensive in a long time.
“When we talk about diversification, we talk about asset class diversity,” Lydon states. This is one of those opportunities that we probably should be a) taking advantage of and paying attention to, and b) when you finally talk about dividend growers, that’s been an area that a lot of people have focused on, as those stocks and companies that continue to increase their dividend over time for the past 15 years, and in this case for the small-cap value area, those companies have outperformed the Russell 2000 significantly.”
This makes dividend growers a great story in general. Most people seeing dividend grower stocks have noticed that outperformance. More importantly, however, it’s key to see the opportunities and advantages in dividend grower stocks and what that means for investors today.
SMDV: An Equal-Weighted ETF
Jaffe then switches gears to the index construction aspect of the ETF, as SMDV is equal-weighted. This means all of the small caps are treated the same way, earning the same amount of money.
Lydon speaks to that, noting how this ETF is not overweighted by a handful of companies. If they qualify for the Russell 2000 small cap value area and have continued to increase their dividends for the past 15 years, they’ll have a piece of that index equal to the rest.
Additionally, the dividends itself are somewhere greater than the 20-year treasury. This means investors are almost getting paid what bonds are offering for staying in stocks.
When asked if this is a case where some of the money has been marked for fixed income, Lydon states how more investors are likely looking at a more traditional 60-40 allocation and moving on to something different.
With yields so low and paying next to nothing, while dividends are so attractive, along with the fact that some stocks are expensive in the US, looking at areas like value or small cap shows fair prices. Going overseas to emerging markets, there are similar dividend grower strategies.
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“There’s a real strong case for taking money that you might traditionally have in the Barclay’s agg, that would be stuffed with treasures, to maybe diversify some of that into stocks where you get that dividend but also buy stocks that are relatively valued.”
In response to this possibly being a 200-day moving average play or just having a small allocation, Lydon explains how its been tough to beat the S&P 500 over the last ten years, but it’s not the same.
“There’s fixed stocks that make up 18% of the index, the Fang stocks,” Lydon states. “It’s stuffed with technology. It’s also a lot more pricey than it was ten years ago. And, more investors in the US, we know from looking at their allocations, are not properly diversified into mid and small cap stocks, and not diversified overseas.”
Lydon believes the message is to get back to diversification and proper pricing and find other ways to get the yield, as opposed to going through traditional diversified fixed income indices.
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