How to Stick With Small Caps During Rough Times | ETF Trends

Smaller stocks, including mid-caps, have been under pressure in recent weeks, but investors looking for value and income in the group can check both of those boxes with the ProShares Russell 2000 Dividend Growers ETF (SMDV).

SMDV, a dividend spin on the Russell 2000, the benchmark U.S. small-cap index, tracks the Russell 2000 Dividend Growth Index, which includes small-cap firms with dividend increase streaks of at least a decade.

Quality stocks, including those on SMDV’s roster, present an opportunity to diversify a portfolio. Specifically, investors should consider quality dividend growth stocks that typically exhibit, stable earnings, solid fundamentals, strong histories of profit and growth, commitment to shareholders and management team conviction in their businesses.

Historical data indicate SMDV is positioned to perform less poorly during rough markets while delivering income for investors.

“Since its inception in December 2014, SMDV’s index has captured only 61% of the small-cap market’s downturns, while providing over 80% of the upside,” said Kieran Kirwan, Director, Investment Strategy at ProShares, in remarks emailed to ETF Trends.

SMDV Secret Sauce

Improving earnings growth could bolster dividend growth in 2020. Investors should consider quality dividend growth stocks that typically exhibit stable earnings, solid fundamentals, strong histories of profit and growth, commitment to shareholders, and management team convection in their businesses.

“SMDV’s portfolio consists of a select group of companies that have not just paid dividends, but raised them consecutively over many, many years,” said Kirwan. “While 10 years of consecutive dividend growth is the minimum, the portfolio’s names average 25 years of consecutive dividend growth, and holds 7 names in the portfolio that have grown their dividends for at least 50 consecutive years.”

Dividend strategies can help mute the impact of volatility by giving investors a steady income stream in the event the markets do get bumpy as a result of unforeseen news events.

“As a group, these are high-quality names that have had stable earnings, solid fundamentals, and strong histories of profit and growth,” said Kirwan. “SMDV’s companies, for example, have higher margins and higher returns on equity- two hallmarks of quality companies- than the broad small-cap market.”

SMDV has performed about 330 basis points less poorly than the Russell 2000 Index this month and yields 112 basis points more than the small-cap benchmark.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.